The current U.S. stock market appears to be following a similar path as was previously witnessed by U.S. investors in 1929 and 1987, and more recently by investors in the Japan Nikkei in 1990, Hong Kong in 1997, and many others. These were the most famous world stock market "crashes" of the century. We have already witnessed crashes in internet and high-tech industries during 2000, will this year also be added to this prestigious list for a "Crash" in the United States? Will the global economy crash too?

Unfortunately, rates may remain near 0% for perhaps another two years. As I have posted earlier (scroll down for my charts on Option-ARM and Alt-A rate reset bubbles) any significant increase in rates will have very severe side effects when the residential mortgage rate reset bubbles peak in late-summer 2011. Commerical loans with adjustable rates are also vulnerable. The combined Option-ARM and Alt-A bubbles is exactly the same size as the sub-prime rate reset bubble that burst last year.

If you recall what the global economic effect was like following the sub-prime rate reset bubble, then you should be able to at least half-guess what effect the combined Option-ARM and Alt-A resets could have. Please also keep in mind that these ARM's are perhaps more volatile than sub-primes were. Option-ARMs were the mortgage of choice for speculators and property flippers who simply wanted the cheapest up-front interest rate, wrongly believing that they would certainly sell the property long before their rate reset occurs.

Because of the near-zero interest rates, the dollar carry-trade seems to be the trade du jour. After all, if you are provided an opportunity to get an unlimited loan for 0%, how much would you try to get? Earlier this year, the Fed opened up their loan window to allow a broad range of Wall Street firms access to these funds. Now, banks, hedge funds, investment brokers, you name it, anyone that is large enough to have the right clout to access the Fed loan window has the equivalent of free money... unlimited free money.

While Congress is discussing rule and regulation changes for Wall Street firms that are unlikely to take effect for several years anyway, the old rules still apply. So Wall Street is not wasting any time taking advantage of the old loopholes. And quite frankly, I think this is all happening with the blessing of Bernanke. If you think about it, Bernanke certainly is aware of the Option-ARM & Alt-A resets coming up along with other similar fragile financial scenarios. And, I think he wants to give Wall Street a chance to replenish its assets before the next painful round of financial stress occurs. If this is truely the case, then Bernanke is very unlikely to raise rates significantly without first warning Wall Street of his intentions, with plenty of time to allow the dollar carry-trades to unwind. But Bernanke is an acedemic, not a trader. The first hint that the carry-trade punchbowl is going to be removed from the party, a mass exit is likely to occur. Traders are all about their profits and could care less about what impact they might cause to the greater economy. If traders believe that any hesitation on their part to exit their trades might reduce profits, then they are more likely to rush to exit their trades. Too many at once means a volatile marketplace.

The rally since last Mar'09 has been mostly Wall Street carry-trades. Retail investors have jumped aboard the rocket bull to ride the momentum. But once Wall Street decides it is time to exit, retail investors will be left holding expensive stocks. Wall Street profits have to come from somewhere, and foreign investors and domestic retail investors are the sheep about to be fleeced.

I have no idea how much further the carry-trade induced DJIA rally will continue. Last month I though the top was likely in -- I was wrong. The S&P500 has retraced 50% from its lows. Whether the carry-trade rally in stocks is to go much higher or not, the 50% retracement is usually a good place for a pull-back to occur.

FDIC:

The FDIC paused closing failed banks for several weeks while they choked member banks for "pre-payment" of future premiums. Now that they have some cash on hand, they are back in the business of seizing failed banks again. I had originally forecast that 200 bank failures would occur from the beginning of the crises to the end of Dec'09. But the FDIC's brief hiatus put a dent in my forecast. The chart below shows that the failure rate is still on track to go exponential. There have been 151 failures so far, and the chart below suggests that we could still see another 42 this year. That puts the total at 193.

If this exponential rate continues, total failures could exceed 400 by next summer. Because of the Option-ARM and Alt-A rate reset bubbles I think the bank failure rate is likely to last until early 2012 (6-9 months following rate reset peak to allow for formal foreclosures). I hope I am wrong about this, but the red line on the chart, when extended into Q1'2012 suggests 3000 bank failures. Yikes! While this may sound like a major disaster, its is only 1/2 of the problem... literally. If we experience 3000 failures along the curve up to the peak, then there is an equal likelihood of another 3000 failures on the backside of the curve. There are only 9000 FDIC member banks, so 6000 total failures would mean 2/3 of the banks could disappear before 2016. Let's all hope it does not get that bad.

But I am confident this will never happen. Why? Because the FDIC cannot possibly survive long enough to even get to this peak. The entire FDIC structure would collapse long beforehand. Just consider the timeframe of the Option-ARM and Alt-A rate reset peak. The FDIC has already forced member banks to pre-pay their premiums through 2012. By the time we get to the rate reset peaks, FDIC will be tapped out and there will be no more premiums coming in.

The FDIC has a $600B line of credit with US Treasury that they could tap. And they will try. But as things continue at ever-higher monthly failure rates, at some point Fed, Treasury, and Congress will realize that FDIC will never be able to pay back that loan. As a result, US taxpayers will be stuck with yet another hopeless bailout.

If that happens, how long do you suppose it will take before people realize that they are providing the deposit insurance on their own deposits?

Deflation vs Inflation:

The M1 Multiplier has made a new all-time low this week at 0.831. In my opinion, as long as this indicator remains below 1.0, and especially if it continues moving lower, then we are in deflation, not inflation. In fact, because this indicator is similar to the velocity of money, it shows that even though the Fed has been printing huge piles of dollars, those dollars are not being filtered down into the economy. Wall Street appears to be the only recipient of those dollars, and they are not sharing any of it. As such, without a wider distribution among the economy participants, inflation cannot exist. The rising prices we are seeing in stocks, gold, and crude oil is almost entirely the inverse result of a falling dollar. The dollar carry-trade intensifies dollar weakness. This recent weak dollar is not necessarily a long-term trend. Rather, the carry-trade is temporary and will eventually have to be unwound. That will pressure the dollar to rise (and consequently put downward pressure on stocks, gold, and crude oil).

I have no doubt the dollar carry-trade is being used to rally stocks, and probably gold too. Because this is largely a Wall Street event, you can be sure that they are employing leverage, lots of leverage. Once the carry-trade unwinds, this leverage collapses just as fast as it went up. Well actually, it comes down faster because Wall Street's desire to lock in paper profits assures a stampeed to be the first in line to sell.

Any asset that is currently trading directly inverse to the dollar is subject to a radical reversal in the event the carry-trade ends.

Wall Street is having a $Trillion private party, we're not invited, but we're
allowed to watch by the sidelines and are expected to clean up the mess
afterward. Rule changes and regulations by Congress won't take effect for a year
or two so Wall Street is living it up while the theft and fraud is still being
allowed.

Thursday, October 15, 2009 PM: I am off again this weekend for another trip so I did not get a chance to write up a more detailed report. I will do it when I get back next week.

The New Orleans Investment Conference was great, I have already decided to return again next year. The speakers and information covered a wide range of topics. Most of the subject matter was related to precious metals (gold/silver, industrial metals, and rare earths). There were discussion panels, such as the one with Karl Rove, Howard Dean, and Doug Casey. It was a treat to watch Rove squirm as Casey belched out that he thought Rove should be prosecuted for war crimes!

Very briefly, here are some subject highlights from the conference:

The "foreclosure pipeline" is strong and should endure for several more years. Currently 1 of every 8 homes is in some stage of the foreclosure process. Despite the large number of defaulted loans, banks are procrastenating on following through to complete the formal foreclosures. (Adrian Day)
Article: Foreclosures: Worst Three Months of All Time.

China has allowed the "lower end" of the manufacturing chain to fail so the high-end industries can succeed. (Axel Merk)

China is the #1 gold producer in the world and the #3 gold buyer. China is by far the largest buyer of its own production of gold. Between the government buying for its reserves and promoting personal ownership of gold for all of its residents, essentially China has created a "golden put" under the spot price which should protect the price from severe price drops. (Chris Powell - GATA)

China is currently the #1 largest consumer of automobiles. Because of this growing demand, China needs commodities and metals to build the necessary infrastructure to manufacture and support all of these autos. (Lawrence Rawston)

The 3 largest world banks are Chinese. (Adrian Day)

The Brazilian oil discovery is a "game changer". Once this huge oil field begins production, Brazil will soon become a first world country. (Byron King)

The USA share of world GDP peaked in 1999 at 24% and has been falling ever since. This is evidence of the US losing its world supremacy. (Adrian Day)

Norway is the "new Switzerland". (Axel Merk) They are the worlds 3rd largest oil exporter with a comfortable budget and trade surplus. The Australia and New Zealand dollars are strong right now, fueled by regional Asian growth. (Frank Trotter - Everbank)

Figure out what the Chinese are going to consume over the next decade and invest in those industries. (Peter Schiff)

You can have an inflationary depression when the supply of goods collapses. If supply drops faster than demand you still get inflation -- even if the US has persistently high unemployment. (Peter Schiff)

We are approaching the "tipping point" in US economy. Currently, 40% of the federal budget is to service its own debt (roughly $419B out of a $1T budget). As we add $1T in more deficit, it adds $40B more to annual interest payments. This is unsustainable. (John Mauldon)

Mexico, Peru, Columbia, and Indonesia will soon turn from oil exporters to net importers as their economies grow. Brazils new oil find will be several years away from production. (Rick Rule)

"After hydrogen, stupidity is the most common thing in the world" (Albert Einstein)

Doug Casey's plan to clean up Washington, DC:

Allow corrupt entities to collapse or to go bankrupt.

Abolish all regulations.

Abolish the Fed.

Withdraw all military troops from all foreign countries (which accounts for 50% of US budget).

Cut taxes by 90%.

Default on all national debt.

Fifty percent of Americans do not pay an income tax yet can be counted on to vote to keep it that way. They will vote to force those that do pay taxes to pay more. (Doug Casey)

Technical analysis: "There are lots of ships at the bottom of the sea. Each one has a chart room. And each room has lots of charts" (Rick Santelli)

Mortgage-Backed Securities: "These derivatives are like a cake. Once it is baked, you cannot take a scapel and separate out the baking soda" (Rick Santelli)

Losing liberty is a self-fulfilling cycle. "You cannot fool all of the people all of the time, but you can fool enough of them to control a large country" (Robert Ringer)

There are about 1500 minerals companies in Canada of which about 1400 are precious metals. Yet about 1300 of these minerals companies have little or no value. (Brien Lundin and Brent Cook)

Institutions are currently only 4% in cash, which is the lowest since the 2000 stock market peak. Gold bulls are in the high 90's percent, the 2008 peak was 96% bulls. US Dollar is currently 3% bulls, compared to April, 2008 low at 6% and the March, 2009 top at 93% bulls. US stock market started at 2% bulls in March, 2009 and are now 92% bulls. These are contrarian extremes. (Robert Prechter)

Since 1913, the US Dollar has lost 96% of its value (worth only 4c now, $1.00 divided by 25x = 4 cents). During this same time, gold has increased by a factor of 50x (from $20.67 x 50 = 1033.50) (Robert Prechter)

The Bush and Obama stimulus have a multiplier effect of zero! (John Mauldon)

US universities graduate more sports professionals and lawyers than engineers. By contrast, India graduates 400,000 engineers and Phd's each year. (Frank Holmes - US Funds)

China + India (Chindia) accounts for 40% of the worlds populations. They want the "American Dream". (Frank Holmes) The "Golden Age" in America actually started to shift about 40 years ago (Stephen Leeb)

The G7 nations are no longer as powerful as the "E7" (emerging countries) which includes: China, India, Indonesia, Brazil, Pakistan, Russia, and Mexico. 80% of the worlds population are in emerging countries - 80% of the resources are in emerging countries - this is the trend for the next decades (Frank Holmes, Stephen Leeb) The countries with money to lend want a bigger role in international decisions. (Ian McAvity)

China - if they have excess they will sell, if they have a shortage they will buy, if any of these are extreme get out of the way! (Marc Faber)

The US is getting addicted to $2T of deficit spending. The first years effect is to goose the economy (like we are seeing now). The second year will require $3T to keep the party going. A $2T deficit next year will not benefit the economy. Any reduction in deficit spending will have a negative impact on the economy. (Marc Faber)

Over 250 years of wealth inequality for advanced economies increased 21 times while emerging countries only increased by 2.8 times for the same period. This trend has permanently reversed. (Marc Faber)

Fibonacci Timing: The time between the 1987 stock peak and 10/16/2009 is 0.382 of the time from the 1929 peak to the 1987 peak. (Peter Eliades)

Many people suggest the next few years will bring about GDII (Great Depresison II). However, this would actually be #6. The first was 1720. 1929 was #5. (Bob Hoye)

When comparing unemployment to 1930's, be aware that in 1929 the unemployment was only 9%. The depression's 25% unemployment figure did not occur until around the stock market low in 1932. (Bob Hoye)

Green energy still requires resources: need water to get oil, need oil to get ore, need ore to make steel, need steel to make windmills... (Stephen Leeb)

Interesting off-site conspiracy discussion: Obama may have received the Nobel Peace Prize as a way to urge the US not to interfer with Iran. With the US out of the way, Russia can quietly stoke the Israeli fears so they make the first strike on Iran on their own. With Iran (and Saudi) oil production disrupted, Russia remains as the regions benefitiary to enhance their greatest resources: oil and natural gas.

Bernanke is turning the Fed balance sheet into the equivalent of a junk bond fund. (Ian McAvity)

The M1 Multiplier was updated today. It came in at 0.883, which is the 4th lowest ever recorded. Since it posted a mild "recovery" in mid-August (but still less than 1.0), the multiplier has shown 5 consecutively lower readings. Clearly, the stimulus programs are only benefitting Wall Street as the multiplier demonstrates that the larger economy has not been affected. And worse, the larger economy is taking cashflow out of the economy rather than spreading it around. Wall Street received the direct impact of the stimulus and bailouts and is essentially hoarding it all for themselves. This remains a deflationary trend.

Thursday, October 1, 2009 PM: Yesterday's closing cash price for gold was $1007.75 (USD) which was gold's highest-ever monthly closing price in nominal terms. The 1980's high price was $850 which, after adjustment for inflation, would be over $2500 in real terms and the highest 1980 monthly close was $709 which would be over $2100 in inflation-adjusted real terms.

For the silver bugs, the 1980's high was $50 which, when priced in current dollars, would be almost $150/oz. The highest monthly close for silver was February, 1980 at $36.37. February, 2008's close was $19.83/oz. Silver's close yesterday was $16.66, so baby silver has a lot of catching up to do if it is going to breaks its own records.

The gold/silver ratio is currently 60:1. As we get closer to peak prices for gold and silver, this ratio should be less than 20:1. Relatively speaking, of the two metals, silver is the better long-term investment. For example, if the ratio gets down to 20:1 and gold reaches $2000, then silver should be $100. From $1008 to $2000 is a 2x increase for gold, but for silver from $16.66 to $100 is 6x!

Eight and a half years ago I said here on CyclePro that gold was beginning a new bull market. Six years ago I said gold would exceed $2000/oz (and that a brief spike to $3000 was likely). I see nothing in the current fundamentals to change that forecast (except perhaps that I may have been a little too conservative).

Wednesday, September 30, 2009 AM: Another quicky update to let you know that I will be attending the New Orleans Investment Conference next week. This will be my first time attending this event and I am really looking foreword to meeting so many of the people I have only communicated with via phone or email over the years. Finally, putting a face to the voice or the prose. I will not be making a presentation this year... if you look at who IS presenting you will quickly note that the lineup is made up of many very high caliber and influential people. I wanted to attend this conference in prior years but my schedule (or budget) never really allowed for it. But this year I was able to put it all together. If any of you are also attending, please come up and introduce yourself, I look forward to meeting you.

Eric Sprott has done an excellent job of describing the demise of the US Dollar reserve currency status in "Save Harbor No More". He takes us through the basic math that clearly demonstrates that from the perspective of satisfying our interest obligations, the US cannot sustain the current trend for much longer.

The following chart is from his article that makes the outlook quite clear -- current annual interest obligations is running about $400B on debt of $11.8T. Total annual revenue is running at $2.16T so the interest is already sucking away 18.5% from revenue. Over the past decades, cash surpluses from Medicare and Social Security programs were stripped out and replaced with US Bonds. It is like the character Wimpy would always say in the old Popeye cartoon, "...I will gladly pay you tuesday for a hamburger today!"

When you include current US debt, plus unfunded Social Security and Medicare funds, the total of these obligations comes to $118.6 trillion. The average interest rate being paid by the US is about 3.36%. Applying that to $118.6T comes to an annual expense of $4T. So, between $400B now and eventually growing to $4T (and assuming the US government takes on no additional debt for the next couple of decades), how much longer will it take before we are talking about real money here?

Thursday, September 24, 2009 AM: This is just a quick note to say that I think chances are pretty high that yesterday's stock market intra-day highs are the top of the bear market rally that has occured since the lows in March, 2009. It is too early to confirm, so we must now wait out the process to monitor the appropriate indicators for this confirmation. The very sharp -3% drop in major indexes over the past 24 hours is not, in itself, enough to flag as confirmation.

If I am right, then the majority of listed US stocks should resume the down-trends of the larger bear market. Gold and silver stocks are not necessarily immune if the general stock market exhibits some very sharp sell-offs over the course of the next several weeks. Volatility should increase substantially as the perception of green shoots and recovery begin to fade.

If I am wrong and stocks make new "recovery" highs, then I will step-aside until indications reassert for another likely peak. This is my first significant call for a peak-in-progress as I am one of the last few remaining bearish analysts. My previous articles provide ample justification for my bearish stance which should hold for at least 2-3 more years.

In an inflationary environment, stock prices should rise as they get continually re-priced relative to the nominal value of US Dollar currency. However, we are not in an inflationary environment at this time. Inflation comes much later. Right now it is deflationary. Later, we should experience what I call "hyper-stagflation" as the paridigm transitions from deflation to inflation.

In summary, this is an alert that stock prices may have peaked. It is very early in the process, but we should begin monitoring for indications that will confirm this view.

Saturday, September 19, 2009 PM:

The following charts are the result of a study that I have been doing for many years. It started out in 1999 with a theory, and then it took most of this time to figure out how to program it. Back in 1999 home PCs were not powerful enough to crunch all of the numbers I needed to build these charts -- it took about 1 week to generate one chart. It was successful in that it proved the concept, but at the same time failed because I could not generate a chart that was timely enough to be useful. So I kind of forgot about it for several years. Until last year when I was able to use a really jacked up PC with quad CPUs and tons of memory. Finally, I was able to put together a better framework to build my program. While I no longer have access to that super PC, I was able to iron out the kinks and build enough to move to my home office PC which now runs through the scenarios in an acceptable timeframe.

These charts dynamically determine what the dominating cycles are behind each price chart for a duration that is statistically significant. This is different than Fourier Transformation analysis. The biggest difference is that I recognized that cycles vary over time. I cannot reveal much more than that except to say that Fourier Transformation analysis assumes there is a consistent cycle always present and makes no allowance for periods when the cycle... simply vanishes or hides for awhile, and then perhaps resurfaces again later, but in a different phase.

The Foundation for the Study of Cycles (FSC) has a product out called TechSignal that essentially performs fast Fourier Transformations on a price chart, idenitifies multiple cycles, and scores them by how well they correlated to the price chart. This is a good program for what it does, but it suffers the same limitations that I just described. To me, these are severe limitations. And quite frankly, after buying the software and using it, it made me even more convinced that I needed to dust off my old concept and get it running.

My new concept is dynamic in that it finds which cycles are most dominant and emphasizes them while they are dominant and reduces their weight as they lose their dominance. In addition, because it is dynamic, it can recognize when a cycle changes its character, such as its length or phase.

So far I have only been working with a limited number of price charts. The charts below are an example of this new concept. These are GLD, SLV, GLD/SLV ratio and DIA/GLD ratio. The black line is a CMA (centered moving average) ratio of 21 days by 55 days -- this de-trends the price chart bars into a horizonal pattern. The orange line is a composite made up of all of the dominant cycles my program finds from the recent price history, weighted by how strong they are. The red line is the forward projection of this composite which provides the forecast.

My observation while working on this concept is that the initial third of the red forecast line has higher accuracy which fades as you move further out in time. When viewed as a progression over time, the forecast line appears like a wet noodle waving along as more price information becomes available. But the initial portion of the forecast has been uncanny with its accuracy.

Two of the charts below are ratio charts. The forecasts for these are generated using the actual ratio, not taking the separate components and somehow smashing them together. The ratio chart itself tends to have a completely separate set of cycles than either of the components.

So, let's see what the forecasts are saying now.

Both the GLD and SLV are suggesting a top of some kind may be due. The SLV chart shows that its retracement may be more severe than GLD. In fact, the GLD chart suggests the retracement may be more of a yawn... not much real conviction, maybe sideways to down for a few weeks. Maybe this will play out like a flag or pennant pattern. The sharper reaction for SLV is further supported by the GLD/SLV ratio chart. GLD/SLV is rather strongly suggesting that SLV's performance may be much weaker than GLD for the next week or two.

The 4th chart is the DJIA/Gold ratio using DIA/GLD as the proxy. This chart is suggesting the DJIA may buy fewer ounces of gold over the next month -- so relatively speaking, either gold is going up, DJIA is going down, or both.

Click chart to enlarge.

I will likely be posting more of this type of charts in the future. For now, I am putting my time and effort into polishing up the programming to make them more automated. If they are going to take a long time to run, then I need to be able to start the progams and let them run through all scenarios while I am busy doing other things, like sleep.

Wednesday, September 16, 2009 AM: As this gold rally continues, I have decided to sell into it with my worst performing dog stocks. These are the gold stocks that I have held for quite awhile, probably too long, whose fundamentals have either not changed significantly for the better or have gotten worse. These stocks have demonstrated during prior gold rallies that they consistently lag behind and under-perform compared to the better quality companies or the HUI index.

I still plan to retain my core gold stock holdings. I have accumulated additional stocks that I have used for short- and medium-term trading and it is only with these that I may consider selling into this rally. I am not there yet -- not even close.

So for now, all I wanted to say was that my gold dogs are being cut loose to free up cash to buy back with better quality stocks. I expect gold and silver to trade with higher than normal volatility over the next several months and that will certainly affect gold stocks. On these volatility driven pull-backs is when I will consider putting this new cash to work.

I believe we are in a gold bull wave up that will register technical "overbought" signals from traditional stock chart indicators, such as: RSI, Stochastics, MACD, and so on. All of these are already showing early signs of being "overbought" but during a bull market wave these need to become extremely overbought before they begin to have any real meaning. Even bullish/bearish sentiment and CFTC Commitment of Traders (COT) commercial short positions needs to reach extreme levels. Conversely, while we are still in the bull wave up, "oversold" is likely to be very short-lived and snap back on a hair trigger. Keep a watchful eye when either of these signals occur and be prepared to make your moves when you deem it appropriate.

Bull markets climb a wall of worry and the technical indicators, sentiment, and COT all provide ample angst to our "worry" here.

Sunday, September 13, 2009 PM: I was reviewing last weeks $1.7T Mortgage Rate Reset chart and realized that by stacking all of the categories together it gave too distorted
of a view of when peaks should occur by category.
I dissected the chart data so we could better visualize when each of the mortgage categories have their own peaks.
The charts below is the same data, but separated by category.
The overall reset landscape is similar but with a slight twist from what I had described last week.

For example, the sub-prime chart clearly shows that its peak has already occured.
We are still feeling the after-effect of those resets by the high foreclosure rate that followed.
The normal delay to go though the formal foreclosure process is 6-9 months. Therefore, sub-prime related foreclosures should be peaking about now (about 200k-230k per month) and then tapering off soon.
If the banks are delaying foreclosure, then that will only take longer to clear out all of the sub-prime foreclosures.
The sub-prime mortgages affected by rate resets ran in the low $20B per month during peak month, the total of which is $460B over the span of 9 1/2 years in the chart.
But by the end of 2009 nearly all of the sub-prime rate resets will have passed and only a small subset of defaulted mortgages await their foreclosure.

The prime mortgages are much smaller and generally have a much higher quality mortgage holder.
However, in light of the current high unemployment, foreclosure rates are much higher than normal, even for prime mortgages.
The chart shows we had a short-term peak occur several months ago, but by far the largest bulge occurs into early 2012.
The total mortgage amount at risk of rate resets is $260B.

The Alt-A mortgage chart shows a steady build up of rate resets from now through early 2012.
The total mortgage amount at risk of rate resets is $300B.

The Option-ARM chart is a very large bubble, peaking in summer 2011. The vast majority of these rate resets will be completed by mid-2012.
The total mortgage amount at risk of rate resets is $310B with the largest single month at $18B.
By comparison Sub-Prime had 13 months that were $18B or more.

The categories that are the most ominous are the Alt-A nd Option-ARMs.
The combined Alt-A plus Option-ARM chart clearly shows that over $20B per month of mortgages are at risk of a rate reset during the peak.
This chart most closely resembles Sub-Prime in scale and time duration.
The total amount of sub-prime mortgages at risk of rate reset
for a 24 month period from 7/2007 to 7/2009 was $422B, Option-ARM and Alt-A combined for the 24 month period from 4/2010 to 4/2012 will be $418B.
Therefore, the Option-ARM plus Alt-A reset peak period will be
almost exactly the same size by mortgage value as Sub-Prime.

Click on charts to enlarge.

The peak of Option-ARM plus Alt-A resets is September, 2011, so 6 months following that we still get March, 2012 as a likely stock market low, that has not changed from my previous post. However, there does not look like we will see much of a separate reset peak in 2010. Instead, it looks like it will be a minor lull in an escalating reset period that continues through 2011.

It will not be until Summer, 2012 that government agencies will be able to truthfully say that the worst of the residential mortgage-related defaults are behind us.
But at that point, we will be up to our eyeballs cleaning up the mess.
This is truely going to be just like a tropical hurricane: the sub-prime was the first wave and wall that passed over, we are experiencing the eye at the moment when superficial things look good, and then the other side of the eye wall will hit starting next year and continue hammering the financial system until summer, 2012.

The US Treasury, Office of Thrift Supervision (OTS) Mortgage Metrics report offers several charts that further clarify the mortgage default trend.

The first OTS chart shows the percentage of seriously delinquent mortgages for each of the 5 most recent quarters reported.
From this we can see that sub-prime default rate is about 17% and Alt-A is about 10% -- sub-prime appears to be flattening out while Alt-A is still rising.
From my charts above we saw that Alt-A is considerably smaller, by mortgage value, than sub-prime.
However, the Alt-A peak will not occur for another 2 years.
Therefore, the current Alt-A 10% default rate is comparable to where sub-prime was 1 year prior to its peak, but Alt-A has much further to go before its rate resets are over.

The OTS report data is about 5 months old already.
Media reports have suggested that the Sub-Prime default rate is already coming down. If the Sub-Prime peak for serious delinquency ocurred
during Q2'09 and the rate reset peak was 3 quarters prior,
then we should be able to use this 9 month time delay as a proxy to guage Alt-A mortgages.

Perhaps a more telling chart about future expectations is this next one that shows the percentage of "modified" mortgage loans made during 2008 that are in re-default by 90 or more days.
The chart is a little confusing at first glance -- the blue line says of the modified loans processed during Q1'08, 13.6% ended up in re-default.
These same modified loans reached a 44.5% re-default rate by Q4'08.
For all of the modified mortgage loans made during 2008, all of them are showing an increasing rate of re-default, not only as time progresses, but also in the inital 3 months immediately following the loan modification.
The Q4'08 data does not provide enough information to see if the trend is continuing into 2009 and the OTS report did not provide 2009 data yet. However, Q4'08 started out with a nearly identical position as Q3'08, so this needs to be closely monitored to see if the same doubling of percentage re-defaults is a persistent trend.

If this trend is persistent, then we should be able to take the average quarterly increases for the other vintages and apply then to Q4'09.
We should expect the Q4'08 vintage re-default rate to reach 36% by end of June'09, 47% by end of Sep'09, and 60% by year end.

While the media has been suggesting that Prime mortgage holders are much more secure and less likely to default, the following 3 charts demonstrate otherwise. For the 3 categories of loan defaults, prime mortgages lead all other groups. The number of new foreclosures, foreclosures in progress, and other actions are all showing substantial increases in prime mortgage default rates. All groups are showing an increase in foreclosures in progress.

Click on charts to enlarge.

Think about how the mortgagee is going to react to a rate increase on these resets. First of all, nearly all mortgaged home values have gone down over the past couple of years. But the outstanding mortgage balance has not gone down. If any mortgage holder is currently paying less than interest-only, the outstanding balance on their mortgage is increasing each month. If they are paying only interest, the full amount of interest due each month, they are still underwater because their outstanding mortgage balance is higher than the home's market value. Even people that are paying interest plus principle on a traditional 30-year loan may be underwater if the drop in market value exceeds the rate the principle is being paid down.
For the people who got into extremely low teaser rates and are only paying interest (or less), any rate increase will immediately force them to pay more per month. For illustration, the traditional 30-mortgage rate is currently about 5.5%. If the original teaser rate was 1% and the scheduled reset goes to 2%, then their monthly payment will double. If it goes to 5.5% in one big step, then their payment also goes up by a factor of x5.5.

This is a very fragile situation. At any moment, the likelihood that mortgage holders caught in any of these situations will default, increases dramatically. Into this economic soup add in some unemployment, a dash of little or no personal savings, a dollup of 401K losses, and a sprinkle of gloom, and you have a recipe for disaster for the banking system.

Monday, September 7, 2009 PM: I hope everyone is enjoying their Labor Day holiday today.

Just a quick note to remind everyone living or travelling in the gulf and SE coastal regions of the country that this week is the seasonal peak for hurricanes. We have had a mild and almost uneventful Atlantic hurricane season so far but this is no time to be complacent. Please keep a watchful eye on the sky by monitoring the National Hurricane Center website for severe weather bulletins and storm tracking information.

This morning a storm moved off-shore, west from the Africa coast, that has the early signature of a possible hurricane. This one is large enough already that it will only take a little more organization to become a major storm within the next several days. This one needs particular monitoring because we are right at the peak season for hurricane formation.

After this strom will be followed by a string of others. At times over the next 4-6 weeks, the satellite image will look like a necklace string of pearls as storm after storm proceeds west across the Atlantic.

If this or any other hurricane appears threatening to make landfall, please be aware that you must make necessary precautions early while you still can. Most people don't want to leave on a false alarm so they tend to wait to the last possible moment to evacuate or buy supplies. But that is always too late -- freeways are jam packed, store shelves are empty, airports may be closed, gas stations have long waiting lines, and tempers may be frazzled. If you believe a storm is headed your way, please make your decision to act before the crowd. Generally, making your decision two days before a projected landfall is already too late and even 3 days may be cutting it too tight.

Saturday, September 5, 2009 PM:

Yahoo has notified me that they are no longer going to be supporting GeoCities website hosting any more. They will be shutting GeoCities down next month sometime. So that means CyclePro Outlook will have to find a new home. I dunno where I will be going yet, so please use the following link which will automatically re-direct to CyclePro no matter where it is being hosted: www.sjw.cc

As far as I know, the old email address will continue working,

After I move to a new hosting platform I will try to find all of the old internal links that still refer to GeoCities and update them to their new addresses. However, some of the really old pages may not get updated. If you come across some pages or features that need to be updated, please let me know and I will add them to my to-do list. Cheers!

Friday, September 4, 2009 AM:

Cash For Clunkers to be Replaced with Similar Program for Appliances

You read that right, it is not a joke. Just when I was thinking the Clunker program was a complete waste, here comes an even worse idea. The government is bound and determined to force anyone that still might have a few bucks stashed away to spend them now, leaving the buyers with even less financial cushion to weather out this financial storm.

These stimulus programs are only compressing sales forward into one very brief period rather than a more natural spread out timeframe. As a result, appliance sales after the program ends is likely to drop off dramatically and probably for a longer duration. This is what will happen with US auto sales (even if the majority of models being bought are foreign made) in the next couple of quarters.

Further back, recall during Y2K when it caused a flurry of buying of new computers just before 1/1/2000? Immediately following, PC sales dropped off almost completely. This was one of the factors that drove the Nasdaq down after it peaked in March, 2000.

The basic premis is that these programs provoke consumers to buy something they might already had considered, albeit now with a government assisted discounted sales price. So anyone who wants to buy a new appliance will buy it during the stimulus program, after that there won't be anyone left to continue buying.

Since this progam is being left up to the individual states to decide how to impliment it, all this program does is effectively expand food stamps outward to include appliances.

The "clunker" program backfired for US automakers. Because more than 50% of the clunker trade-ins went toward foreign vehicles, it allowed foreign manufacturers to snag an even larger share of the US market. This puts even more pressure on Detroit to come up with much more competative vehcles to try to regain this lost market share. Couple that with the pulled-forward sales and coming sales drought caused by the clunker program, Detroit had been hit both above and below the belt.

Just-In-Time-Inventory Hits the Skids?

The international economy is much more intertwined than previous recessions/depressions. The past 50 years has seen a progressive movement toward (perceived) efficiency for international trade. Basically, this means all commodities (crude oil, strawberries, cement, whatever) is operating on a just-in-time-inventory basis today. The risk of a shock is significantly higher today because there is very little depth to each market. They all expect to be able to place an order and receive the product almost effortlessly and without a hitch. Since so little of our consumer products are actually manufactured or grown in the US, and the international distribution system is fragile enough, that a moderate shock could severely upset the whole works.

This entire system is almost entirely perched upon the US dollars current dominance as a reserved currency. If the dollars fall is gradual, then the reliance upon it should also be gradual as a shift away from the dollar plays out -- maybe a few hickups along the way, but at least a muddle through. However, if it happens too quickly, then I think all hell breaks loose and that delicate distribution system is likely to shatter. That could be quite painful -- imagine not being able to buy strawberries in January! (lol) This coupled with all of the other economic ailments going around, a deflationary death spiral could very easily result.

As long as the M1 Multiplier remains negative (ie: a value less than 1.0) the outlook remains deflationary. This means that of all the $trillions Bernanke is dropping from his helicopter on to Wall Street very little (if any) is actually making it to Main Street. The negative M1 Multiplier simply says that even if Americans are getting a sliver of Bernanke's bucks, they are preferring to hoard or save it rather than spend it.

Click to enlarge

Jim Rogers said "...I could have one heck of a big party too, if I spent a trillion dollars on it". I think that is a perfect analogy because Wall Street is enjoying the party favors while Main Street is out behind the gate looking in.

Once Main Street begins to receive some benefit of Bernanke's helicopter drop, then perhaps the outlook could change. The budget deficit is certainly a concern and I have little doubt that that will be monetized via the digital printing press. But it is probably years away before we feel any effects from it.

US banks were hit hard by the subprime default meltdown. But an even bigger default opportunity awaits during summer-fall of 2010 and another larger wave in 2011. These are the Option-ARM and Alt-A rate resets. Combined, these are as big (in dollar volume) as subprime was last year. 2009 is simply the mortgage default scenario taking a breather. This is a lull while the news media is scrambling to find evidence of a non-existent recovery. The 2010 and 2011 reset waves should have a much bigger impact on banks than the subprime bomb.

The subprime event hit when banks were weak, but not yet crippled. Now many are crippled from it. FDIC bank failures are increasing. As we go through the 2010 wave with option ARM and Alt-A resets the banks will be hit while they are weak and undercapitalized. With almost no time to recover, the 2011 wave will hit and an even weaker banking system will be hit harder yet. It could result in a knockout. The Alt-A mortgage holders may not be as weak as sub-prime, but the option ARMs are just as weak. It does not matter, the dollar amount of these mortgages are similar to subprime in overall magnitude and much larger on a per-mortgage basis.

If residential mortgage defaults were not potentially damaging enough, there is also the commerical real estate loan defaults looming large. By analogy, the Option-ARM/Alt-A events are like large waves on an open sea -- the commercial event is like a rogue swell that is substantially larger than the two residential events. However, we can see and forecast the timing for the residential events, the commercial event is a little more difficult, and like a rogue wave, it can happen at any time and last for quite a while. Already, the water level is rising, suggesting the swell may be entering the bay.

Also using the same analogy, a wave that occurs at the same time as a swell intensifies the height of that wave. As such, if the larger commercial event occurs in tandem with the residential events, the impact to the US banking system is likely to be dramatically amplified. If you have ever been to the ocean and tried to stop a wave, you know it is a futile exercise.

Folks, this is scary stuff!

This timeframe could shift outward if the Fed pardons defaulting mortgage holders or forces banks to provide more leniency against formal foreclosure. But that will also undermine bank profits (or magnify losses) and merely postpone systemic breakdown. I am not saying the entire financial system will disintegrate, but it is going to lose a few apendages, and that will certainly be painful.

The budget deficit and other Fed bailout strategies may stoke nasty and threatening inflationary storm clouds on the horizon, but the deflationary threat here and now is stronger well into 2012 and the shrapnel cleanup period that immediately follows.

2012 will plumb the depths of deflation (likely a full blown depression!) and then slowly transition into a nasty stagflationary era. Sometime well after 2012 is when I think the inflationary pressure will have its first chance of manifesting into real substance. If I am correct, around 2016-2017 is the timeframe when inflation should be at its maximum bloom.

It will be up to the Fed at that time to see if they can mop up to keep inflation at bay. It is one thing to drop dollar-bombs from a helicopter, it is an entirely different matter to recollect them afterwards. More of a classic view, inflation cannot occur as long as unemployment is high. The Fed can monitize debt, bailout Wall Street, and Obama can run higher budget deficits... these events do not cause inflation unless Main Street has the cash with which to spend and is comfortable doing so. As long as the blizzard of Bernanke Dollars remains isolated to Wall Street and DC, there will be no inflation... and the government spending $400 on hammers or toilet seats does not count... inflation requires happily employed consumers to spend money.

My original 2003 CyclePro Outlook forecast was for the stock market lows to occur by 2012. I later revised my gold/silver peak outlook to 2016-2018. I think those are still viable, although it shows that I have had to come to terms with a disjointed stock bottom with a gold top... I believe these turning points may occur several years apart.

August, 2011 is the last and largest major reset peak for residential Option-ARMs and Alt-A's so formal foreclosures should occur about 6-9 months following. By spring, 2012 the worst of the residential reset storm passes. This cleanup, however, will probably have to work itself out on its own because the Feds stimulus gun will probably be out of bullets by then. Americans are likely to be financially exhausted and too fearful of spending money on anything they don't have an immediate need for. There is likely to be a rather long stretch of survivalism that dampens consumer spending.

It is very, very difficult for me to even consider inflation at this time while all of these heavy and vulnerable mortgage rate resets remain queued up to execute. You can mark it on your calendar because, baring major Fed intervention, it's gonna happen.

Real estate investors may have to wait until 2012 for the opportunity of a lifetime to pick up obscene bargains for pennies. But to do so you will have to have the cash. I have no doubt that an RTC-like agency will be created by then to provide home buyers with terrific foreclosure bargains and excellent new mortgage terms, which essentially means 20% down and very low fixed rates for 15 or 30 year terms. Between now and then, the only viable residential real estate opportunity for anxious home buyers that I can see is with assumable FHA mortgages that already have low fixed rates.

Posibilities of Civil Unrest

Civil unrest is a distinct possibility, but not just over the next few months or years. Think decade - at least to 2018.

We already discussed the Option-ARM, Alt-A, and commercial real estate mortgage defaults coming up -- when you have people both dispossessed from their homes AND umemployed unrest will be an even greater threat.

Couple this with a financial system that is already weakened from sub- primes last year, 2009 seeing nary a recovery (except from media shills and cheerleaders), and then the 2010 wave hits these weakened banks, and followed on with the 2011 wave which hits even weaker banks.

The subprime event taught us something about how the rest of the economy responds to it. We saw credit freeze, loan applications denied, reduced business profits, a wave of layoffs, consumers cutting back on spending, yada, yada. And stocks performed a little dance for the devil (at SPX 666).

Next year there will be another wave of mortgage defaults as Option-ARM and Alt-A rates get reset. Sometime along the way commerical real estate may see some major defaults. Because of continued economic and unemployment drag, residential prime and agency defaults are likely to increase as well. The tally of FDIC bank failures are likely to be in the 4 digit range after these wave hit the banking system. The 2011 wave of residential defaults is likely to be the real back breaker of the economy.

Mid-2012 is when the last major wave of mortgage defaulters will be completing the foreclosure process and be physically removed from their homes. Of course the Fed may change the rules of foreclosure protocol, but that will only prolong the reckonning.

Timing Stock Market Lows

Notice that the sub-prime reset default peak was September, 2008 and the stock bottom was March, 2009. That was a 6 month delay.

I believe spring, 2011 will be a wave low caused by aftereffects from the fall, 2010 default peak. The final stock low should be in spring, 2012 following the 2011 default peak.

I dunno yet if these will be lower lows or just retest lows. I think because of the cumulative effect of the series of events causing more and more weakness, stocks will react with progressively lower lows.

The 1929 scenario did not play out exactly the same way, but events occured in a series that progressively broke down and stocks reflected that with its own series of progressively lower lows into summer of 1932. You can imagine the stock charts of 2010-2012 looking like a slinky walking down a stairs.

A Fibonacci Exercise

I like fibonnaci numbers for my forecasting. I think the current environment is one fibo expansion larger than 1929-1932. The 1929 event took 34 months to go from 1929 peak to 1932 low. Our current event should therefore go 55 months, from Oct, 2007 all-time printed high to May, 2012.

Want it a little more precision? The number of days from 1929 peak to 1932 low was 1039 calendar days. Expanding by fibo x1.618 calculates out to Friday, May 18, 2012. This should be the depression low -- somewhere around 5500.

The inflation low should occur in 2017. My long-term
inflation-adjusted DJIA 17.6 yr cycle chart is currently suggesting 17.6 years from the 2000 peak (which was the inflation-adjusted all-time high), and that calculates to be Monday, August 21, 2017. By then the inflation-adjusted DJIA should be below 4000 (the actual DJIA is likely to be much higher).

The following recaps the 200-year Inflation Adjusted DJIA that I posted last year (log scale):

El Nino Woes for Natural Gas Prices

It is called the El Nino Southern Oscillation (ENSO), or "El Nino" for short. The opposite event is referred to as "La Nina". In a nutshell, EL Nino is when the equatorial waters off the west coast of Peru (and extending far west along the equator) become much warmer than normal. This warmer water changes the dynamics of the global climate. The weather effects are felt far west from Australia to eastern United States. A La ina is just the opposite, upwelling of water from lower depths cause the same equatorial stretch of ocean to become cooler than normal.

The effect on climate is profound.

I created the following charts in 1998 that shows the correlation between El Nino and La Nina for various regions of the country. The Gulf Coast (GC), Southeast (SE), and Northeast (NE) all have similar El Nino patterns: Summer months tend to be mostly normal to slightly cooler while Winter tends to be quite a bit colder than normal. February tends to be month that has the most variance colder. The Northwest (NW) region is just the opposite: Summers are also fairly normal, but Winters tend to be much warmer than normal. The other regions of the country do not have a significant-enough pattern to draw any reliable conclusions.

Click on charts to enlarge.

These changes in temperature are enough to affect the demand side of the equation for energy prices. The solid lines in the charts represent El Nino events. The dashed lines represent La Nina events.

These charts demonstrate that a North American winter-time El Nino makes the winter temperatures in these regions colder than normal (NE, SE, GC) and warmer for NW.

NOAA (National Oceanic Atmospheric Administration) is predicting that the current El Nino will persist all the way through this next Winter 2009/2010.

The Natural Gas March 2010 futures contract traded as high as $9.44 last summer, but this week it was down to $5. The NG prompt month (Oct'09) was down to $2.50 yesterday in a highly contango market. The Cash price for NG was $2.04 yesterday. It is very likely the cash price will trade below $2 over the several weeks.

Right now is approaching the tail end of storage injection season. As of 8/27/09, overall storage is 3258 Bcf while the average for this time of year is 2850 and full is considered anywhere from 3450 to 3545 Bcf. This means that storage is nearly full, so there is little demand to buy more and inject it into storage. Natural Gas is often used to power electricity generators that need to ramp up and down quickly, such as for A/C use. The summer has been very mild to cooler than normal so there has been very little demand from A/C's.

A Trading Opportunity for NG

The difference between the cash NG price ($2.04) and next years Oct'10 futures price ($5.52) is a guaranteed gain of better than a double in one year. This means if you were to go out today and buy 10,000 MMBtu at the NG cash price of $2.04 and immediately sell one Oct'10 futures at $5.52 while storing that gas for one year, you would gain $3.48 or +170% (minus storage and pipeline transportation fees).

Heck, for that matter, buying and injecting NG at $2.04, selling a Nov'09 futures contract for $3.66, then withdraw the gas next month, the gain would be +$1.62 or +79%... in only one month! Or with the Dec'09 futures contract, +$2.46 or +120% in only 2 months! Not bad for a physical commodity trade that is as risk-free as you can get!

The catch is that you must have storage capacity available to inject gas right now.

This is something for companies and municipalities to consider if they have their own NG storage facilities and have ample unused capacity above their normal winter level. Calendar arbitrage opportunities like this do not come along very often. As long as you have a certified NG storage tank or salt dome storage connected to any of the NG pipeline networks, and if you have space available, you may want to consider this risk-free trade.

Withdrawals from storage generally do not begin until about 1/2 way through November. So storage demand for Natural Gas is likely to remain mostly dormant for the rest of the injection season.

For disclosure, I am not currently trading NG or HO. However, I think traders should be monitoring NG and/or HO during the week of expirations for Oct'09 and Nov'09 contracts (NG expiration dates are 9/28/09 and 10/28/09, respectively). Since NOAA is expecting El Nino to persist into the Winter months, then these are the most likely timeframes to consider buying Mar'10 or Apr'10 contracts. Ideally, the NG trade would be held until the Mar'10 expiry on 2/24/2010. This is because January and February should be colder than normal during an El Nino in the regions that use the most NG and HO for winter heating. As such, storage reserves should be significantly reduced by then, thus energy buyers will have to supplement by buying NG/HO from the cash market.

Right now, the NG chart looks like it still has some downside to play out even though the cash market is already running around $2. I think the Elliott Waves need to complete 5 waves down from Jun'09 high. This should provide ample time for traders to figure out if they want to try to catch this buying opportunity closer to Oct'09 expiry on 9/28/09 or perhaps hold out for the days or week leading up to the Nov'09 expiry on 10/28/09. I am thinking Oct'09 should trade down to low $2's also (which may have completed today), bounce up to the high $2's, and then sell down to a new lower-low to catch up with the cash price on or just before 9/28/09.

GAZ and UNG are ETF's for natural gas. From their respective peaks to current lows, NG cash prices have lost 78% while GAZ and UNG have each lost 83%. But for an ETF I guess that may be acceptable slippage. UNG is the more liquid of the two ETF's and even has options. UHN is an ETF for Heating Oil, but I do not recommend anyone use it because the daily volume is too light -- too illiquid.

There are many ETF's available for crude oil, do your own homework on these if this is how you want to play (I strongly do not recommend any leveraged bull or bear ETF's such as 2x or 3x hybrids, I do not think they are suitable for anything longer than a day-trade).

Gold and Silver Price Breakout

I wanted to spend some time discussing the possibility of Gold and Silver breaking out to new highs, but I waited too long to begin my chart analysis and, as you are already aware, the breakout has already occurred. As I am writing this, spot gold is trading at $991. This is only $40 from a new all-time high for gold. My outlook on gold remains bullish, however my time horizon is years, not weeks. Hopefully I can spend more time on gold/silver in my next update and provide some chart analysis before it happens.

Sunday, August 9, 2009 PM:

Demographic Paradigm Shift

Consumers have been stung so badly by the economic downturn (real estate, stocks, etc) that they have begun to realize that they were needlessly over- extending themselves and need to cut back. Personal savings will increase and debt will be paid down. But all of this financial side activity does not benefit the "consumer-driven society" that we had been living for the past 30 years or so. Therefore, the paradigm shift is occuring now, the enlightenment of living within ones means, away from consumer spending and more toward saving and debt reduction. This is the same generational enlightenment that was felt 3-4 generations ago during the 1st Great Depression. And the cycle repeats. The current generation seems to be coming around. But the reluctant ones, like the baby-boomers, I am afraid will need a full-on depression to get them to wake up and get onboard this new paradigm.

Cash for Clunkers

"Cash for Clunkers" program is a perfect example of what can happen when the government gets involved in private enterprise. And, no, it's not necessarily a good thing. The program has actually created a temporary support for the US auto industry as recent sales reports shows a mild rebound. But it clearly reminds me of what happened to computer buyers leading up to Y2K. Recall that people feared that year 2000 (Y2K) would be unsupported by older generation computers and therefore fail to operate properly the moment the year ticked over from 1999 to 2000. The simplest solution was to buy a new computer. It turned out to be a non-event. But what it did to the computer industry was severe. You see, everyone who wanted to buy a new PC, bought one. After Y2K passed, there were practially no new buyers... so the PC industry experienced their own little recession.

Now the "Cash for Clunkers" program is about to do the same thing for the auto industry. Ok, I will have to admit that I think our Congress-persons had their hearts in the right place wanting to help, but the laws of unintended consequences will be kicking in very soon and oh boy is it setting up for a deuzy.

First, the market for sub $4500 used cars is drying up as people trade them in. This hits the lower income sectors that cannot afford to buy new cars or qualify for financing. Then it trickles outward to auto repair shops, parts suppliers, and other industries that cater to the used auto market.

Next, as soon as the Clunker program ends, the US auto industry will begin a horrible recession, possibly their own depression. Computers may last a few years before people trade up to new and fancier gizmos. But the lifecycle for cars is a lot longer. Couple this along with the fact that the rest of the economy is already in a bad recession causing people to scale back on big-ticket purchases, the US auto industry, and the shockwave that will enwrap the global auto industry, heads for the toilet. People who bought new cars by participating in this program have committed their spare cash toward those cars and that natually leaves less cash available to purchase other consumer goods.

Third, the US auto industry accounts for a substantial portion of GDP as well as millions of employeds. "Cash for Clunkers" should take a noticeable chunk out of GDP and divert a fair number of workers toward the unemployment lines. Auto manufacturers, parts manufacturers, dealerships and sales lots, and auto transportation companies are all likely to feel the impact.

FDIC Continues to Seize Banks

The rate of bank failures is growing exponentially. The following chart shows the actual and CyclePro estimate for the next several months. With 24, July, 2009 had the highest monthly number of bank seizures since the financial crisis began. Three more bank failures were announced last friday, August 7, 2009.

Since February, 2007, the total number of bank failures has been 101. If I am correct that the failure rate will increase exponentially, then the remainder of 2009 may see an additional 100+ failures -- I am predicting a total of 207 by the end of December, 2009.

The Washington Business Journal reported that the FDIC is in the process of staffing up in anticipation of an increase in bank failures. This plays well for my prediction of an accelerated failure rate. Obviously, only the FDIC knows for sure how many banks will be seized. 2009 has seen an average of 9 failures per month, so even a linear projection forward suggest at least 45 more failures this year. If the FDIC thought the failure rate would be tapering off, would they still need to staff up? No, I don't think so. The fact that they are indeed staffing up strongly suggests the bank failures will continue for an extended length of time.

Furthermore, the FDIC is specifically staffing up a new regional office in Jacksonville, FL. They plan to have the office in operation by September, 2009. Since Florida has been one of the three regions most affected by the real estate market crash, it looks to me like Florida may lead the bank failure tally over the next year or two.

US Dollar Continues to be Propped Up by Carry-Trade Investors

The bleak fundamentals for the US economy should be reflected on a falling US Dollar. But the carry-trade by foreign investors cannot resist the near zero borrowing interest rate. This has provided substantial support for the dollar. The Japanese Yen was the subject of a huge carry-trade for many years. It ended rather badly once the unwinding began. For just as much support that is created as the carry-trade begins, the selling from an inevitable unwinding will likely take it down much lower than if allowed to drift on its own. Initiating the carry-trade begins slowly and cautiously, while the unwinding will be brief and panic-driven to get out before the cost of unwinding overtakes accumulated profits or actual losses.

The US Dollar carry-trade will likely persist for as long as the borrowing interest rates remain near zero. The longer the carry-trade remains profitable, the deeper and more imbalanced the trade becomes, and the worse the outcome when the eventual unwinding occurs.

Bailouts could cost U.S. $23.7 trillion

Neil Barofsky, the special inspector general for the government’s financial bailout programs, says the US is headed for a possible $23.7 trillion in total bailout cost. This is not an absolute worst-case scenario, but certainly an estimate that is possible if the economy worsens significantly from here.

Once again, I want to try to help understand how much one trillion is. Imagine a relay race where a runner receives a baton the instant they are born, carries it throughout their entire lifespan, and then in old age the instant their heart takes its last beat, passes that baton on to another newborn infant. Continue this progression through a series of human lifetimes to form an uninterupted sequence of human heartbeats. If the first baton was handed off by the last remaining Neanderthal (30,000 years ago), then today, modern man has reached its 1 trillionth heartbeat.

M1 Multiplier

Click chart to enlarge.

My view of the M1 multiplier has not changed. As long as it stays less than 1.0 it means the Fed is getting increasingly less bang for the buck... oh, sorry for the bad pun. Regardless of how much Fed "money printing" has been going on for the past year, very little, if any, is actually making its way through to Main Street. Instead, it is funneling through Wall Street. A negative multiplier suggests people are preferring to hoard rather than spend their dollars. Inflation cannot happen unless people spend today fearing that holding dollars will have less purchasing power tomorrow. Folks, the second wave of a double-dipper is approaching.

While I agree with the premis of each of these articles, the issue with AIG's bailout being a mere conduit for GS is rather short-sighted. AIG received $Billions in Federal bailout money and loans from the Federal Reserve. Some of this money was used to pay AIG's trading counterparties. The top 4 recipients were Societe Generale, Deutsche Bank, Goldman-Sachs, Merrill Lynch. While all the press coverage is about the amount GS received directly from AIG, what everyone is missing is that GS had counterparty trades with Societe Generale, Deutsche Bank, and Merrill Lynch too. GS received far more than the reported $13 Billion from AIG. These other firms were also conduits for siphoning bailout cash from US taxpayers and paying it to Goldman-Sachs.

Although the exact amounts that GS received from these other firms has not been disclosed, I am certain it far exceeds the $13 Billion reported from AIG. Further, Karl Denninger asserts that GS received the AIG payment twice: once directly from AIG and again from their hedge trades. If GS also has similar "hedges" in place for Societe Generale, Deutsche Bank, and Merrill Lynch then GS may have received double payments here too.

GS has set aside $11.3 Billion for employee compensation and bonuses for the 1st 6 months of 2009. This comes to nearly $1 Million per GS employee.

Every once in awhile, ok, rarely, Glen Beck says something that actually makes sense. On the subject of Goldman-Sachs, the following video snip does a pretty good job of diagraming how GS has infiltrated US government to position themselves for their own profit opportunities.

I keep telling you, it is only a matter of time before a number of GS directors start showing up on the Forbes 500 list!

Real Estate Update

Despite media crowing about the Real Estate markets rebounding, home prices continue to fall. The chart below (as of April, 2009, latest data available) shows the real estate market is down almost aligned with CyclePro's 2008 forecast. The rate of fall is slowing. The broader US market is down by 1/3 while Miami is getting close to -50%.

Click chart to enlarge.

The US mortgage debt outstanding has flattened out while the mortgage debt per household is continuing to fall. This statistic is not nearly as good news as it may first appear. The number of US homes has increased as well as the number of homes that are still being financed. The amount being financed is falling. But much of this is because of people buying foreclosed homes, which are being purchased at steep discounts from the peak market prices a few years ago. And to make it worse, many of the foreclosure purchases are being bought outright with cash (because banks are still reluctant to issue new mortgage loans). Banks are tending to hold or postpone foreclosing which keeps the home prices on their books at full value rather than a more accurate market value. If they were forced to follow their own foreclosure guidelines, their balances sheets would immediately bleed red for all to see. This smoke and mirrors will eventually have to be exposed -- banks cannot afford to allow defaulted mortgage holders to live in their homes rent-free forever.

Falling R/E inventory does not necessarily mean unsold homes are being bought up. Rather, developers are only listing their inventory a few units at a time as a means to artificially prop up the asking price. As soon as one of these units sells, another immediately gets listed. Developers are in gross denial. But as long as they have enough cash to slog through the remainder of this recession, then great for them. Homes that have been listed for sale for more than a year is an indication that the asking price is unenticing to potential buyers - developers need to respect laws of supply/demand and systematically lower the asking price until buyers begin to show interest.

Trump Tower Update

To bring you up to date on this project in Sunny Isles Beach, FL, the Trump Tower project is collapsing. This was a 3 tower project, each containing 271 luxury condo units, all of which were completely sold before breaking ground on constructing the first tower. Unfortunately, most of those "buyers" were property flippers, who have since walked away from their initial deposits. All three towers are now completed and available for occupancy. Tower I has 143 units sold, 128 unsold. Tower II has 53 sold, 218 unsold. And, Tower III is already completely bank owned after zero buyers followed through on their initial purchase contracts. To make matters worse, buyers discovered that Donald Trump only lent his name for the initial marketing -- the Trump name was to be removed after all purchase contracts were completed. As you might expect, the buyers are furious and have banded together in a class-action lawsuit against the developers.

Next door to the Trump Towers is Solis. I wrote about this project last April, 2008 when I uncovered the news scoop that they had gone bankrupt. The photo I posted at that time is exactly the same you would see if you drove by the project today. Two construction cranes are still upright, a neighbor told me they have a crew go out every month to start them up and turn them so they don't rust in place. That has got to be costing someone a ton of cash for the rentals on those cranes. Worse yet, after 16 months of rusting in the Florida humidity, the building exposed steel rerods and girders may have rusted to the point that the building may be unsalvageable and may have to be demolished.

Townhall Mobs

It does not matter who is behind it: Republicans? Insurance companies? Big Pharma? The confiscation of information exchange during Congressional townhall meetings is going to backfire in a big and disasterous way. Already Americans are feeling angst and fear about the economy, their jobs, their personal finances, and their future. It is an explosive tinderbox waiting for a catalyst to ignite tempers and outrage. The recent mob-stoking at townhalls may very well be just that catalyst. While the mob organizers are specifically trying to turn attention away from benefitial dialogue on Obama's Healthcare Program, the intensity of the verbal (and physical) attacks could very easily stoke a much greater mob. People are angry and scared about losing their jobs or not being able to find a decent replacement. On the surface many Americans appear to be disciplined and tollerant. But underneath lies a seething caudron of emotional imbalance, intolerance, fear, and even racism. If it continues, torches and pitchforks are not far down this path. I predict that before the Congressional recess is over, deaths will occur during or as a result of altercations at these townhall meetings.

Socialized Health Insurance - Can We Avoid the Moral Hazard?

What is considered "normal" nowadays? By definition, "normal" means approximately average. With 2/3 of Americans significantly overweight or clinically obese, does this mean that people who are proper weight will end up paying higher premiums to pay for the majority of fat people? Where is the incentive for overweight people to trim pounds? The healthcare proposal as I understand it, will expect all of those that participate to contribute like a giant group insurance policy. So yes, this means those of us who maintain healthy lifestyles and trim physiques will end up paying more so obese people can continue their unhealthy lifestyles. That's the way group insurance programs already work.

But the new "majority" will have control of the votes.

The bottom line, healthy and fit is a choice, smoking is a choice, obesity is choice, ignorance is a choice. Please don't send me scathing emails about how unsympathic I am for saying 2/3 of Americans choose to be obese. With TV reality shows such as "Biggest Loser" and "Dance Your Ass Off" demonstrating that lifestyle change does in fact reduce weight, I don't want to hear anyone tell me about their history of failed diets, depression, and loss of self- esteem. If you do not want to change your lifestyle, learn to eat healthier, and take opportunities to increase your physical activity, then you are likely doomed to wallow in self-reinforced and family- and friend-reinforced obesity for the rest of your lives.

I just recently went through the gruelling process of switching health insurance providers. My former provider jacked up the monthly premium during my birth month (because I got older) and because I moved to a community that has a higher than average number of retirees (which implies a higher death rate per capita). I can see escalating premiums as we age, but mine doubled in just the past 4 years. Then one month after my birth month, they doubled it again because of my new zipcode. Yikes! I'm healthier now than when I was 15 years younger!

Obviously, my rates were hiked because the insurance companies believe they have no obligation to keep rates down. I think this latest rate increase was simply because they know someone with pre-existing conditions will have difficulty getting a new policy, so they jack up the rates, even for healthy accounts like mine. I switched to a different provider for a better policy, similar deductibles, and 1/3 the premium.

The problem with my former policy is that I was a member of a group program. Therefore, even though my health is excellent, others in the same group were getting worse and that caused rates for all group members to rise. Obama's plan is essentially the same.

Further, if there are insufficient incentives for people to make the necessary changes to get their weight down, then people are likely to continue their unhealthy lifestyles. As their health erodes (diabetes, heart disease, reduced mobility, etc) they can easily fall into a death spiral whereby poor health begets worse health, and then it gets even worse from there. It seems as though people expect the government to give them a free magic pill that will un-do their accumulated ills.

That's not gonna happen.

And even if it did, all it would do is create an even worse moral hazard. The path of least resistance is to do nothing. Take the pill and continue the ways of the past.

Left unchecked, the human body has an unlimited capacity to store energy in the form of fat. To stop gaining weight, you must eat less or not allow that fat to accumulate, you must exercise or increase your metabolism to burn it.

Do you want to know the secret for maintaining a good and healthy physique? Here it is in one extremely simplified formula:

Waste is fairly constant, so for even more simplicity let's take it out:

E = B + F

Now we can see, very clearly, that if you eat the same amount and you burn more calories (by increasing your metabolism) then less fat will be retained. To stop gaining weight you either must consume less, burn more calories, or a combination of both. To actually lose weight, you must either eat a lot less calories, burn a lot more calories, or a combination of both.

The problem for most obese Americans is they do not seem to understand how basic nutrition plays in this equation. For many, stuffing "food" into their mouths to gain the feeling of being full is what eating is all about. Never mind that the purpose of eating is to provide natural sources of nutrition that our body needs (vitamins, minerals, etc). If you eat un-nutritious food, your body will demand that you eat more to attempt to get the vitamins and minerals it needs. Your body will create food cravings to get it. And as a result, you gorge. If this additional food is high in fat, your body cannot burn all of that energy, so it does what it does best -- stores that energy for later use, in the form of fat.

The quality of food you eat is far more important than the quantity.

And even if you are eating healthy foods, quantity can be a big problem. Most Americans eat until they reach a certain level of fullness -- like stuffed to the gills. Over long periods of time, even a lifetime, they have trained their bodies to eat larger and larger amounts of food with which to achieve that desired level of fullness. If you can train yourself to eat more, then you can train yourself to eat less. It is not easy, but this is where discipline comes in. As long as the body is getting the nutrition it needs, over time your body will demand less and less bulk to feel full and satisfied.

As we age, particularly over 40, our metabolism naturally begins to slow down. As a result, we must eat less to maintain proper health and physique. Even if older Americans are not obese, most tend to have protruding paunches. In almost every case, this is a direct result of consuming more calories than the elderly body needs. The formula applies to elderly too. The metabolism shows down with age, so too must the intake of calories and low nutritious food.

Increasing ones metabolism is desirable if you want to lose fat. But most Americans are lazy, thats right, I said L-A-Z-Y! Drive to Wal-Mart and circle around until you get a parking stall nearest the front door. Avoid the stairs and take the escalator or elevator instead. Drive the kids to school instead of having them walk -- pick them up after school, take them to soccer practice, then treat them to dinner at McDonalds. Am I right? Sound familiar?

When I go shopping I make it a point to take the first parking stall that is available, regardless how far it is from the store. I always take the stairs, well I admit to compromise: up 5 flights or down 8, beyond that I take the elevator - additional flights are good exercise, but in a corporate environment I don't need to arrive to a meeting all sweaty. I live in a highrise condo on the 9th floor, I make an effort to use the stairs all the way, both directions, at least several times a week. This is passive exercise. You don't necessarily need to go to a gym. Increasing your passive exercise is one step closer to the lifestyle change you need to have better control over your health and fitness.

You don't have the time? Make the time!

A very disturbing American trend is severe obesity in children. Some of this is caused by parents who do not understand proper nutrition or allow the child to eat unsupervised. Some of this is caused by the fast food industry. These companies employ flavorologists whose job is to make all of their food taste delicious (nutrition is only cursory, profits are what is critical). Is fast food really "food" or is it just something to stuff in our face to feel like we ate something? Sadly, I believe it is the later. In addition to nutritionless food, the fast food industry is very good at luring people into their restaurants via effective television and other advertisment campaigns. Then there is the peer pressure from other child friends to eat what they eat. Is it no wonder why our kids are fat?

It is time for me to stop this little nutrition rant. There is a lot more I could cover, I could probably write a book, but this is not what you came to CyclePro Outlook to read. So I will stop here. The simple formula (E=B+F, calories eaten equals calories burned plus fat retained) is a good one -- think about it every time you eat, every time you step on a scale, every time to look at yourself in a mirror, every time you go grocery shopping, every time you need to choose between stairs or the escalator, every time you go to a restaurant, every time you sit down to watch television, every time you feel you need a snack, every time you shit. Make it a lifelong commitment to change your lifestyle to make this simple formula part of everything you do. Your health and fitness will greatly benefit from your effort. I took the time to tell you all this, because I really do care.

Thursday, March 5, 2009 PM: Irrational? Perhaps. Exuberant? No way!

Today, the DJIA has come full circle to a time when what I think was a pivotal event in the markets. Today, the DJIA traded to a low of 6544.10. The last time it was this low was December, 1996. That month was when Alan Greenspan gave his famous "Irrational Exuberance" speech. And, in my opinion, was the last time he employed at least some prudence and responsibility as the role of a Federal Reserve Chairman. After that speech, Mr. Greenspan turned on all investors and started pumping the mantra of American productivity and the new internet business model. But I don't want to waste my time talking about how he helped to engineer the mess were in since so many other people have done excellent jobs covering that. Rather, I want to point out that in December, 1996 Alan Greenspan thought the markets were grossly overvalued. This was a time when he still expressed his own opinion based upon the statistics and information available to him. Up until that point I still had a certain respect for him. (But very soon thereafter, he changed 180 degrees, and with it, my respect.) We are now back to that same DJIA level, twelve years later. Nothing has really changed... the DJIA is still overvalued. People who invested then on a buy-and-hold strategy are right back to where they started -- all of the paper gains have vaporized. And with it, their hopes and dreams.

We are in a totally new environment than 1996. The banks are in shambles and they are on the verge of pulling just about every one of our large corporations down with them. The large number of notional value of derivatives held by the banks will be their downfall. The details are available from the Comptroller of the Currency in their Derivatives Fact Sheet report.

I have been writing about Derivatives Danger since 1999. After ten long years and a better understanding of what lays before us, we are now finally starting to witness what I had long predicted.

In very simple laymans terms, a swap derivative is simply a written agreement between two parties that amounts to nothing more than an elaborate bet or wager on the outcome of a certain event. An event could be the price of natural gas at Henry Hub (Louisiana) at some time in the future, or crude oil delivered at New York Harbor, or the price of coffee beans at New Orleans, palm oil in Singapore, or even pistachio nuts in London. Based upon the maturity provisions of the derivative contract, one party would pay the other cash depending upon how the price played out by an agreeded upon end date and time.

Derivatives simply moved gambling on price targets from Las Vegas to the boardroom of corporations. These bets were usually made on commodites that were directly or indirectly used or created by the company, and often used to hedge price volatility, but the bottom line is they were nothing more than gambling bets nonetheless.

Under normal times, bi-lateral netting with counterparties significantly reduced the true exposure or risk of loss from these huge trading portfolios. Essentially, once a trade was offset with an opposing one, the deals were tossed out of the balance sheet (as level or tier III asset) because they were thought to be zero-netted. We now know this was a Cinderella dream.

Bi-lateral netting is no longer support, it's "safety net" has disintegrated because many of the banks counterparties are no longer trustworthy to fulfill their obligations and to honor the terms of the derivative contracts. It really is all about trust and confidence -- right now there is zip, nada, none!

What this means, is that the $88 trillion derivatives book of JPMorgan's, the $39 trillion of Bank of America, or the $38 trillion of Citigroup is now completely exposed to loss. JPM's book is exposed 49:1 to their assets. This means a mere 2% loss completely wipes them out! Bank of America is 28:1 to their assets.

But it does not stop here. Certainly the majority of the problems filter down to real estate and toxic mortgaged-backed securities and all of the various manifestations of them. But other corporations will be affected too. I know as fact that just about every large trading shop in the US, plus many around the World, made derivative trades with JPM, BofA, or Citi. These were not just financial related, like currency or interest rates, some of the trades were for crude oil, corn, steel, electricity, sugar, coffee, cattle, and everything in between. Every one of these banks had exposure to companies like: GM, Cargill, Monsanto, 3M, Alcoa, even odd categories like Hersey's or Schmuckers. Basically, if a company wanted to use derivatives to tailor certain risk parameters they could find a counterparty to do it with, and often the big banks were there to make it happen. The bank took the role as middleman, did the trade on one side, charged a service fee, then offset their risk exposure with someone else. By doing this, the bank pocketed the service fee and walked away with the assumption that the two offsetting trade positions would net themselves out with absolutely zero risk to the bank.

We now know this is no longer true.

The banks used other banks to offset some of the trades. The creditworthiness of these banks are highly questionable. Citi is on the verge of outright bankruptcy, and the other big derivative players are not too far behind. By the end of this month, I suspect the Dow Jones Industrial Average will be reconfigured to replace Citi with something else. Further, the New York Stock Exchange has the unfortunate requirement to notify Citi that they must maintain a stock price above $1 per share or risk getting kicked out of NYSE -- Citi will be relinquished to the OTC pink sheets as they wallow in death thros until they are completely gone.

This is the same script for many of the other big derivative players. Now I am not talking specifically about banks. Now I am talking about all of the peripheral companies that did derivative business with these banks. When the banks default, the other companies will be left holding completely exposed positions. Even if a company holds a derivative contract that would otherwise be a big gainer for them, could thereafter be frozen and locked as a bankruptcy receivable to the bank. I recall this exact situation when it happened following formal bankruptcies at PG&E and Enron in the early 2000's.

Now all of these other companies are forced into taking huge losses. If they are prudent and lucky, they will quickly offset their exposures with other willing counterparties. They may still take a loss, but forward exposure may be mitigated for awhile.

This past weekend I showed how the rate of bank failures is accelerating and todays commentary reveals that the big banks have survival issues of their own. Now you know the rest of the story behind the Federal Reserve's steadfast hold on secrecy and why Sheila Bair yesterday admitted that the FDIC could be insolvent by the end of the year.

Saturday, February 28, 2009 PM Two more banks were added yesterday to the FDIC Failed Bank List. This brings the total for the month of February, 2009, to 10 failed banks, a new monthly record -- there have been 44 failed banks so far in the 25 months since this crisis started. January held the previous monthly record with six failures. February's failure rate is a 67% increase over January and represents 23% of all bank failures reported so far. In October, 2008, CyclePro listed 130 U.S. banks that had a well-above average likelihood of failure -- 22 of the 130, or 17% have since failed.

While the number of bank failures is alarming, perhaps the more critical thing to note is that the rate of failure appears to increasing, at least on a monthly basis.

Sunday, February 22, 2009 PM

Book Review: The Unified Cycle Theory

Stephen Puetz has written a fascinating new book "The Unified Cycle Theory - How Cycles Dominate the Structure of the Universe and Influence Life on Earth". Not a sketchy tome covering a few related cycles, no, this is a 495 page in-depth research work that covers an unbelievable range of timeframes.

While not everyone will be immediately engaged in the full range of this material, once you read through it the links and correlations will begin to sink in. The material in this book provides debatable fodder for students of economic cycles as well as historians and scientists across a broad spectrum of disciplines: geology, astrophysics, and climatology. You see, the Unified Cycle Theory (UCT) is a naturally occurring cycle series, what Puetz calls the Extra-Universe Wave Series (EUWS).

Puetz begins with a general overview and then steps through each cycle timeframe from largest to smallest.

Each of the cycle timeframes presented are a fractal series of cycles within cycles, within cycles, from the very largest to the smallest. Each cycle timeframe length is determined by the timeframes of the cycles directly below it. For example, three of the 6.36 yr cycles make up one 19.08 year cycle. Three of the 19.08 yr cycles make up one 57.24 year cycle, and so on. When the peaks of several cycle levels come together at the same time, the effect upon nature is extra strong. And the converse is true when cycles align in toughs.

While theoretically the timeframes of the cycles in the UCT sequence could get very, very short, the smallest cycles covered in this book is a mere 28 days. The largest... well let me put it this way: just when you were just starting to warm up to the whole idea of "Big Bang", now as a result of carefully sequencing small cycles into larger cycles, into even larger cycles, Puetz's largest described cycle spans 22 Gyr (Gyr=Gigayears, which is 22 billion years). Most astrophysicists believe the age of the universe at only about 13 -14 billion years, so what to make of this 22 Gyr cycle? Think multiple big-bangs... that is, a big-bang followed by a big-crunch, then another big-bang, and so on. Because beyond 22 gyr lies ever-larger theoretical cycles, such as 66 gyr, 200 gyr, and 599 gyr cycles.

While that subject is likely to spark some interesting debate among astrotheorists, the subsequent sequence of ever-smaller cycles offers similar bits of tantalizing discussion for everyone.

In my opinion, the real meat of the book is when Puetz gets down to the economic cycles for the recent history of man's financial endeavors, say the last three or four hundred years or so. This is where he has gone through very painstaking, yet requisite, detail correlating historical events with each of the theoretical cycle peaks and troughs.

In particular, the cycles that range from 28 days through 172 years are the ones that have the most impact, and benefit of foreknowledge, for current stock and commodity investors. All of the cycles in this range are well known already. And, some researchers have devised theories about how they may be interrelated. But until Puetz wrote The Unified Cycle Theory, no one had demonstrated how these cycles relate to other cycles in our natural universe. The implications are astounding, if all of the cycles from 28 day to 22 Gyr are truly interrelated, and then perhaps there is a natural "heartbeat" somewhere that drives all cycles.

For example, 172 year cycle: If you read through some of the various online forums where participants discuss which former historical market panic most closely associates with our current one, some are instinctively drawn to the Great Depression of the 1930's and the stock market peak of 1929, but more astute historians point out the distinct similarities with the panic of 1835. When you add 172 years to 1835 you get 2007, which is the peak of the recent real estate and leveraged securitized trading bubbles, the bursting of which, are the cornerstone of today’s financial crisis.

To demonstrate the full timeline and using the timeframes outlined in the book for cycles from 28 days through 172 years, I built a composite graph of the ideal UCT. I created a detailed timeline from 1750 through 2050 in three separate charts: 1750-1850, 1850-1950, and 1950-2050. In the last one, I marked where we are today so you can see what to expect of the forward outlook. W. D. Gann used to say that if you want to know what is likely to happen in the future you have to follow what has happened in the past. That is why the role of history is so crucial and why Puetz has gone through so much effort to describe the historical details of each of the prior cyclic events.

Unified Cycle Theory - A Close-Up View

My own previous analysis had picked the 2016-ish timeframe as the likely trough for the next DJIA/Gold ratio low and the Gold/Silver ratio low. This was what I had previously determined as the likely time when the stock bear market would end and the next bull market would begin. One of the interesting revelations that I found with this series of graphs is that 2016 may be just a mere resting point for a much deeper and more troubling outlook. As the 1950-2050 graph shows, for as severe as the 2007-2016 sequence may turn out to be, another of similar magnitude may play out from 2026 to 2035. In fact, the entire Baby-Boomer retirement financial outlook appears to be rather gloomy and fraught with disappointment. The message for everyone else, don't look up because the stock market peak has already occurred and the next peak of similar magnitude may not occur again until the year 2179.

Further, the investor environment over the coming generation or two should be for traders who can employ the self-discipline to move in and out of stocks. Proponents of buy-and-hold financial strategies are unlikely to do well. I continue to see a role for mutual funds to provide the level of swing trading that may be necessary to wade through the new investment era. It appears we may have to go back to investment basics: buy low, sell high, and often.

Stephen Puetz's The Unified Cycle Theory should prove to be an excellent guide to help navigate the unchartered future. As history tends to rhyme, this book will be the roadmap to lead us forward.

Disclosure: The opinions expressed herein are entirely my own. I have no financial interest in promoting this book. However, as an ardent student of cycle theory, I am pleased to support those that contribute so much to the general knowledge of this fascinating field of study.

Thursday, February 19, 2009 PM A very quick update tonight... The Fed's M1 Multiplier was updated today and it finally stopped its nasty decline. The new level is 1.011, so it is at least back above the critical 1.000.

Sunday, February 8, 2009 PM The Fed's M1 Multiplier continues to drop. The latest figure is 0.885, which is below the critical 1.0 level. As I
have stated previously, I interpret this as evidence that we entered into the deflationary death spiral in September, 2008. The M1 Multiplier has only gotten worse over time.

It simply means that for every dollar the Federal Reserve adds to the economy its monetary effect is having a less and less stimulative impact. It also means a growing number of recipients of these dollars are hoarding (either
saving or siphoning) rather than spending them. This is putting the brakes on the velocity of money in our economy. Another way of looking at it, progressively more and more of the Fed's newly printed dollars are getting flushed down the financial toilet.

Click chart to enlarge.

The Goldman-Sachs Conspiracy One has to wonder what to make if the fact that so many of our former and current high-level public officials are former Goldman-Sachs officials. Are these guys part of a cabal of sorts infiltrating into our government or are they simply effective and efficient businessmen?

One way to determine whether there is a Goldman-Sachs conspiracy or not is to monitor the Forbes 500 Richest Men in America list. If the members are using the bailout as an opportunity to increase personal riches for
themselves and their buddies, then we should see a growing list of current and former Goldman-Sachs executives show up on this list. I doubt we will notice an increase for 2009 but maybe as early as 2010 or 2012. Personally I prefer to believe that these guys are extremely good at what they do and that is why they have been asked to serve in high-level government positions... but let's hold that thought for a few years and check back.

When Henry Paulson became the Secretary of the Treasury in May, 2006, so that he would not have a conflict of interest, he personally had to sell $492 million in Goldman-Sachs stock and options. But because he sold it to become a public servant, he was not required to pay any income or tax penalties. Just for round numbers, a 28% tax rate on $492 million comes to $55 million per year for the 30 months that he served as Secretary of the Treasury. Although this was indirect (ie: keeping what otherwise would have been paid in taxes) it essentially makes him the highest paid government official ever.... and it was all legal. And to ensure his stint was limited to only 30 months, he had to do a really, really crappy job so Obama would not want him... and that Henry Paulson also did exceptionally well.

Sunday, January 11, 2009 PM I had been waiting for the new release of the Federal Reserve statistic for "M1 Multiplier". It just came out friday for the 2 week period ending December 31, 2008. I wanted to wait for this particular update because I needed to make sure that we had 2 consecutive periods showing what I believe is ominous and unprecidented in U.S. financial history.

The M1 Multiplier has gone negative and it has been negative for the entire month of December, 2008.

When I say "negative" what I mean is that the multiplier is now below a value of "1.0". The multiplier is related to money velocity. In other words, if the Fed prints up and introduces a new $1 bill into circulation and if the multipler is more than 1 it means the 1st recipient used the money to spend on something to which the receiver uses that dollar to spend on something else, and its receiver spends it.... and so on. Each time a subsequent holder of that dollar spends it, the velocity of money increases, and the multiplier increases, or at least close enough for this discussion.

When the multiplier is exactly "1.0" it means the dollar may have been spent, but its recipient did not use it to spend on something else... either he kept it, perhaps in savings, or used it to pay down existing debt.

So a multiplier value that is less than "1.0" simply means that not all of the first recipients spent the dollar... they kept it for savings without allowing it to circulate through the economy even once. Another way of looking at it is, as the Fed adds more dollars for circulation into the economy, the benefitial effect of those dollars actually works against them. The first holders of those dollars are hoarding them, not spending them. It also means that dollars that are already circulating around the economy are changing hands fewer and fewer times before someone along the way decides to break the chain and saves that dollar.

A multiplier less than 1 means the economy is not growing, it is contracting. In my opinion, this statistic is the essence of "deflation".

This is particularly disturbing if it continues as a trend because it means that Fed is now completely out of bullets for short term stimulus. The interest rate is essentially at 0% so they cannot lower it any more. Pumping more dollars into the economy is not being "multiplied", so each subsequent new dollar added has less and less of an impact. Mr. Bernanke jokingly said in 2002 that he could always twart deflation by dropping unlimited dollars from helicopters -- with a negative M1 Multiplier, those dollars are more likely to be hoarded than spent.

A negative M1 Multiplier means that Bernanke's financial alchemy was a failure and the whole experiment blew up in everyones face.

It also means that Obama's planned individual tax rebate and stimulus package will probably fail because those dollars are more likely to be used to pay down existing personal debt or for personal savings.

The chart below shows the multiplier history since 1984.

Click chart to enlarge.

If I am correct, then I should not be surprised if the Fed stops reporting the M1 Multiplier.

Judging by this chart, I cannot see how anyone can argue that the immediate financial threat is inflation. Clearly, this demonstrates deflation, and not just a little. It means the deflationary death spiral may have already begun.

For those that are stubbornly holding on to an inflationary outlook, you are way too early. Your time will come, but not for several more years. All of these stimulus dollars should eventually slosh through the economy and rear itself in major inflation. But not today, not yet. (See below for more on the deflation/inflation debate).

Deflation has arrived. And none too soon. The Kondratiev (Kondratieff) Winter is already upon us and this is a major deflationary event.

For those of you who need a refresher on the Kondratiev cycle (also referred to as the K-Wave or Long Wave) here is something Ian Gordon put together a few years ago: pdf 3.3Mb

Bad Money Drives Good Money Out Of Circulation, Gresham's Law. The essence of this law means that given multiple forms of redeemable "money", people will tend to save or hoard that form of money which they believe to be the best quality or value (ie: Gold, Silver) and use the lowest quality of money (ie: US Dollars) for routine exchange and commerce. This law originated to explain the effect during medievil times when metal coins would be shaved or worn such that some coins actually contained less metal than others -- the coins with more metal were the better quality and were thus hoarded while the shaved and worn coins continued to be used in routine commerce.

Gold is the premier investment during the deflationary K-Winter. Gold just happens to also be a great investment during strong bouts of inflation. As such, gold is very likely to shine as one of the top investments (if not "the" top) for our current era. We are experiencing deflation right now and on the backside of this we are likely to experience a nasty bout of inflation. Gold is the best for both environments.

I have no doubt that once this era has passed we will have seen the DJIA/Gold ratio fall below 2:1, and that is using raw prices without any adjustment for inflation. We have been following this ratio since 2003. The peak was reached in May, 2001 when it was 41:1. The ratio during 2008 traded between a high of 15:1 and a low of 9:1. Friday's close was about 8600 for DJIA and $860 for gold, thus a current ratio of 10:1. My original time target to reach 2:1 was sometime between 2013-2018. While it is possible it could hit early, I am not ready to place any bets on that scenario... 2013 or better for my money.

Inflation was here, where did it go? Last summer, we witnessed crude oil prices reach just shy of $150/bbl. Crude Oil represents our modern demand and consumption of energy. As the price of oil rises, all other energy products must also rise. Likewise, any product or service that relies upon it must endure higher energy prices, and at some point those higher costs must get passed on to higher prices for the product or service. While this is not the strict definition of monetary inflation, the fact remains that high energy prices eventually induces higher consumer prices. There is no significant product or service in the U.S. that does not directly or indirectly require energy. The price spike last summer was incredible in how far it got, along with the entire World caught up in it, when the only real push behind it was a speculative mania over peak-oil. As I have said before, peak-oil is a very real phenomenon, but it is a very long-term event. Investors must resist trading short-term for a long-term event. It was incredible how so many people got sucked into the alure or momentum of the oil rally. Had the fundamentals of oil been solid on its own, without the peak-oil cheerleaders, the price would still be high. But, alas, because of the high price, people hoarded all things energy (oil, natural gas, gasoline, etc) and refineries geared toward better efficiency and the slimmest of margins to crack out more gasoline. Once the bubble popped, all of that inventory came gushing out into the open. I think the price has over-reacted to the downside like a rubberband snap from $150. Enjoy it while you can, the current low prices at the pump are temporary, even considering this onset of K-Winter.

There are some spotty examples of inflation floating around. Enough that many people are confused whether we are seeing inflation now or deflation. Perhaps the biggest argument for inflation comes from the Fed's response to the financial crisis by providing a near-unlimited amount of dollars to banks and financial institutions. If the Fed prints up $100 trillion dollars and then sits on it, that money is not inflationary because it is not participating in the commerce of the economy. In a similar angle, if the Fed provides bailout dollars to a bank and the bank hoards it, the same thing happens, no impact on inflation because the dollars don't get into circulation.

As with many of my CyclePro Outlook updates, I created a long list of topics I wanted to discuss, but ran out of time to compose adequate discussion material. So as a compromise, here are a few quick topics for 2009:

GM is in deep trouble. The UAW is strangling them. The GM pension was largely funded with GM stock - now that the stock price has fallen -90% from $40 to $4 over the past 14 months the pension funding is woefully underfunded. GM is legally obligated to meet certain funding requirements - the money will have to come from somewhere. If bailout money is used to shore up the pension then it means GM will have that much less funds with which to keep their company operating. If Congress passes legislation to relax defined-benefit plan obligations then retired workers lose.

Candy is dandy but liquor is quicker (Ogden Nash). Liquor sales in late-2009 and through the next 4-5 years should rise. People will look for creative ways for escapism, but like the cute poem, liquor will be the easiest. Fancy foreign vacations will wane, opting instead for entertainment in the home or domestic, local destinations.

RTC 2009, the modern equivalent of the Resolution Trust Corporation (RTC) is likely to be born this year. The new RTC will attempt to re-value existing mortgages and find new owners for foreclosed properties. In the same ways as it worked in the 1980's, the new RTC will likely become overwhelmed with the volume of foreclosures such that they will dump them at rediculous prices, just to move inventory.

The RTC will have its hands full since the current trend among re-contracted mortgages is a persistent high rate of foreclosure. These were mortgages at risk of foreclosure that were re-negotiated to help the homeowner. But the homeowners of these re-contracted mortgages are still defaulting at around 50%.

Residential homes are level-II assets. With home values continuing to fall, homeowners feel about their homes in a similar way that banks feel about their MBS's, CDO's, and other level-II and level-III assets.

Commercial R/E is next to implode. We are already seeing signs of it, this down-trend should accelerate in 2009.

Traffice citations are on the rise as an alternate form of taxation. In Florida not only the volume of citations are increasing but the dollar amount of each violation has also increased.

Dwindling number of US banks. The competition among small banks is fierce and getting tougher. Making this worse will be large banks that benefit from sucking on the Fed teat will have an unfair advantage. Expect consolidation as small banks merge to better compete, and large banks gobble up anything they can afford using taxpayers (bailout) dollars.

Morgan Stanley is apparently interested in buying the Smith Barney brokerage division from Citibank. Morgan Stanley has cash? Hmm, is this buyout being financed by their dollars or our dollars?

Is inflation the answer to falling R/E prices? A quick answer is yes, a significant inflationary spell (which includes comparable rising incomes) could raise homes prices back to where they were at the peak. But unfortunately, the wealth value of those dollars are greatly diminished.

For example, if J. Doe makes $60,000 per year and bought a $400,000 home at the peak, and the home is now worth $300,000, inflation at a high-enough rate could eventually cause the real estate market to rise again such that the Doe home could be priced at $400,000 again. But if the Doe income rises to $80,000 they are really no better off: 300/60 = 400/80. The only thing that changes is J. Doe's perception of wealth. In other words, if his paycheck is larger, he "feels" more wealthy. The fact is, he is no better off.

If the current deflation trend deepens into a depression, will we as individuals have to resort to self-sufficiency to survive, similar to what happened in 1930's? The TV show "The Walton's" took place during the great depression and showed how people had to resort to self-sufficiency. But a modern depression should be quite different. First of all, the US is largely a service economy rather than manufacturing or agrarian. When money gets tight what's one of the first things households cut back on, services that they can do themselves. If people provide services for others, and those get cut back, then that in itself is a big factor to enforce a deflationary spiral.

Exposing the fragility of a service economy. Here is an example, as simple as CyclePro can make it: Let's say I own a landscaping and grass trimming company with a staff of workers and plenty of regular clients. I own a nice home with a swimming pool in the back yard. My neighbor runs a pool maintenance company so I hire him to clean my pool each week. His wife is a fung shui expert and people hire her to help them decide how to position their sofa for the most benefitial "chi". If the economy starts to deflate, some of my clients may decide to trim their own lawns - maybe I might have to layoff a couple of my workers. Worse yet, I may have to learn how to clean my own pool and terminate the service from my neighbor. His wife's clients may decide they can position their sofas on their own and no longer need her service.

So you see, in a largely service oriented economy, everyone provides a "service" to someone else. In booming economies, everyone is happy providing these services and expanding their business. But once the economy starts to sour, people hunker down and pull back a little. Pulling back means prioritizing which services you need to continue and which you can do yourself to save money. A terminated service to one can beget a terminated service to another. This can create a death spiral of a chain reaction of cutting back on unnecessary services. The more the spiral tightens, the lower their priority, or less necessary these services become. In theory I suppose, it is possible for an ultimate collapse of a service economy is when everyone is out of work because no one wants to pay someone else to do something they can otherwise do themselves.

This is particularly scary since the M1 Multiplier indicates that the delation death spiral may have already started to tighten. As the economy contracts, the need for services wanes. This tends to contract the economy even more. And the deflation death loop continues, twisting tighter and tighter. Since our GDP includes all of these "services", GDP should also contract... but not a little - alot, because we have very little manufacturing to fall back on.

Florida's deflating real estate is on track. Last April, CyclePro Outlook forecasted real estate to collapse by -40% to -50% from its peak. That forecast has been proven to be quite accurate. While searching through Miami, FL property tax records I found the following condominium in Sunny Isles Beach with sales history that goes back to 1980. Note the shape of the peak and crash is falling almost exactly inline with the forecast:

Click chart to enlarge.

Using sales price per square foot we can see the highest price was about $340 in 2006. The most recent low was about $140. That's -58% for these two extreme cases. The red moving average line shows a drop of about -30%. In this particular property there have been no reported sales for the past 5 months, but there are over a dozen units listed in foreclosure. This means the price per square foot is likely to drop even more. I expect to see the red average line move below $150 by the end of 2009 and the extreme low should get to $100 or less. If this property follows my generic Florida forecast chart then by perhaps as early as 2013 we might see an extreme price drop to $50. Judging from the sales history that would be a bargain. However, once the extreme washout is over, prices should rise and stabilize closer to $100 during the following decade.

To follow up on my earlier article on the Trump Towers (also in Sunny Isles Beach), the first tower started closing on sales in Januray, 2008. Of the 271 units in each building, 110 have been sold with the most recent sales occuring in August, 2008. The 2nd tower has been open for occupancy for two months, but the county property tax records do not yet show any sales. The 3rd tower remains under construction but should be ready for occupancy sometime late Q1, 2009.

Just to refresh you on this property, the Trump Towers was completely sold out before construction began on the first tower. But because so many of the buyers were property flippers having put down only minimum deposits ($20,000), many have walked away. To compound that problem, apparently there is a class action lawsuit in progress where allegedly Donald Trump only "lent" his name to help sales of the property. Apparently the developers were planning to change the name after sales were completed. Buyers are apparently upset that they paid a premium as a "Trump" property, only to find out later that the name would be changed. Perhaps this explains why the 2nd tower has no units with lights on after dark.

There are times when being wrong about something can be a good thing. My CyclePro Outlook for the $700B bailout costing much more than the Fed said it would cost was unfortunately spot on and not a good thing at all. Although I tried to be conservative by suggesting the final cost may end up being 5x more than $700B - about $4T - my logical discussion comparing prior government bailouts/interventions showed that 16x was a possibility. Already, the US Fed is on the hook for $5T and we have got so much further to go before we can say this mission is over.

Some of the bailout money was to go to banks so they could lend again - lending did not improve. Some of the bailout money was to go toward individual home mortgage holders who were deep underwater and being foreclosed upon - not even a penny was spent to help individual citizens. Of the $290B already spent and down the toilet is money given to banks so they could (1) buy other banks (and not necessarily distressed banks) and (2) provide cash bonuses to their partners and management staff. This was such a great gift to the banks that everyone and their brother started lobbying to re-charter themselves to become "banks" so they could partake in the feeding frenzy.

Even AIG's initial $85B was insufficient. US taxpayers now own majority interest in AIG stock, yet we now find out that this taxpayer investment is practically worthless. So now we have to cough up even more money to keep AIG going if for no other reason than to try to salvage our own investment. The new estimate is $149B.

Remember what I said about the bank bailout, that government estimates are usually too low by 8x to 16x, and that a very conservative initial guess might be a mere 5x? I think we should consider the taxpayer investment in AIG has been lost and unrecoverable because the total AIG bailout might be closer to $425B and with that there is no guarantee they will survive. On September 16, 2008 US taxpayers paid $85B (as a loan!) for 80% of the common stock. On 9/8/08 AIG stock closed at $22.46, on 9/15/08 it was $4.76, on 9/16/08 after the bailout was announced the stock dropped to as low as $1.25 intra-day and closed at $3.75. Friday it closed at $2.08.

So exactly how much did US taxpayers pay for our AIG stock? As of friday, there were just under 2.7B shares outstanding, 80% of that is 2.15B shares. $85B/2.15B = $39.53 per share. As of friday's close, US txpayers have lost 95% of their initial investment in AIG. For as bad as that is, that's not all. Upping the bailout total to $149B means our effective cost per share is now $69.30, yet the market price is only $2.08.

Our current financial debacle is just getting started, we are no where near the end. With that in mind, I think we could eventually see AIG stock trading below $1 and following that being delisted from NYSE. At that point, taxpayers will own AIG, the newest penny stock. Well... actually that is not going to happen because there are exactly three paths for AIG to follow from here: (1) complete bankruptcy, (2) merge into one of the Fed-supported chosen ones banks, or (3) a miracle.

Inflation/Deflation? Got a coin? Flip it. The arguments coming from both sides of this discussion have very good points. I am currently in the deflationary Kondratieff Winter camp. The bailout activities are hugely inflationary, but the effects of all of this extra cash sloshing around the economy are not going to be felt for several years. At that time, the inflationary genie gets released and then the fit hits the shan. For the time being we are knee deep in deflation as the K-Winter snow piles up, the financial temperature gets colder, and everything begins to freeze.

One of the major arguments that inflationists are using is that the US will have no other choice but to print Dollars to pay for the bailouts. While I am sure there will be lots of new Dollars printed, I believe a lot of the initial cash will come not from the press but from foreign reserve diversification. About 4 years ago (before CyclePro fell into its 3 year nap) I had postulated that the reason we had not been feeling the effects of inflation from an expanding money supply already was that a lot of the newly printed T-Bills and T-Bonds were being sent overseas as part of central bank reserves. China accumulating $2T is one example. This essentially took the cash out of circulation, and therefore did not participate in increasing the money supply as far as what was actually being circulated. I said that someday, those Dollars will eventually be repatriated back to our shores. If this event is well coordinated its effect will be gradual. Still inflationary. But if the event is uncoordinated, like every country fend for itself, then the selling could be intense.

My best guess is that the US will use all of its remaining clout to engineer a coordinated program to allow central banks to diversify out of US Dollar assets. The effect of this on the US economy is identical to the Fed printing more Dollars without having to actually do so. If this is the case, then I would not be surprised if this is a primary discussion topic for this weekend's G-20 conference.

Oil prices have dropped by more than 1/2 - partly due to: (1) a normal profit-taking pullback, (2) hedge fund deleveraging and long speculative margin calls, and (3) the recognition that people are scaling back and consuming less oil. The combination effect has been incredible. With oil prices in the $150 area, it was hugely inflationary because everything directly or indirectly related to commerce requires energy from oil. Businesses tried to eat as much of the high energy costs as they could, but that was really starting to break down and as a result we saw energy surcharges popping up all over. Peak Oil is a very real phenomemon, but the fear that drove up oil prices was a very short term panic for what is actually a very long term event. I have no doubt that we will eventually revisit and exceed $150/barrel again some day, but that event is quite a ways off right now.

The recent oil bull campaign was an excellent example of a micro-bubble within a much larger financial arena. The price was about 1/3 fundamental, 1/3 speculative, and 1/3 panic and fear of running out. The frothy speculation and panic has subsided somewhat, so what we are left with is the base short-term fundamentals as the current price reflects.

Gold has a similar story. The price peak last March was also about 1/3 fundamental, 1/3 speculative, and 1/3 panic and fear from limited/reduced exploration and production. All three aspects fed upon each other as prices exceeded $1000/oz. Now prices are on the low $700's so just like oil, a lot of speculative froth has been taken out. When the hedge funds were forced into selling assets to raise cash to meet investor redemptions, no assets was overlooked: oil, gold, stocks, commodities, you name it, it was sold down.

I wish I could say the worst of the hedge fund selling is over. Unfortunately that is not the case. In reality, the hedge fund selling will not be over as long as there are still hedge funds that need to raise cash to meet investor redemptions. Last Friday was the deadline for investors to request a cash redemption so they can receive it before the end of the current tax year. Now the hedge funds have about 6 weeks to do their selling. Some have already started (as witnessed in Friday's hard selldown during the final 30 minutes of the regular stock trading session). I don't think they will all necessarily rush to the exit at the same time, but the more sophisticated among them will use all opportunity at their disposal. For example, some may begin by selling S&P futures on GLOBEX as early as Sunday evening and then converting into their stocks during the day session. Others might begin selling individual US stocks that are traded as ADRs on foreign exchanges before the US market opens.

Because their very survival depends upon meeting these redemptions, hedge funds are prone to panic selling just like everyone else. It is all about the emotion of being boxed into a corner and having to fend for self-preservation to survive. If futures and stock indexes start cratering too quickly, many funds may feel they have no choice but to grab whatever they can get, at any price they can get. Time is not on their side and they know they do not have any luxury of waiting. Waiting may present them with much lower prices. This could actually be quite explosive.

The intra-day rally last Friday accomplished a gap closure left over from Friday's open (DJIA, SPX, NDX, QQQQ, SPY, DIA, etc). Now that this little technicality has been achieved, pressure leans heavily toward resuming the downside. As for my own trading, I plan to treat any rally this next week as an opportunity to add to index put options or reverse index ETFs.

Gold at $10,000/oz? Larry Edelson's article The G-20’s Secret Debt Solution is about how the G-20 may be discussing a new world order currency in which they will agree to decree that gold will be priced at $10,000/oz and existing currencies will be devalued by a factor of 10:1 or 12:1. This will allow the US to raise enough cash to pay off 20% of existing debts, and other countries to essentially pay off all outstandng debts, and start over. While I would like to dismiss this as rather implausible, after all I am long gold and having it immediately repriced to $3000, $5000, or even $10,000 is akin to hitting a lotto jackpot. It does hold a smidgen of possiblity. I still hold to my original forecast of at least $2000/oz someday, along with a very brief spike up to at least $3000. But I also said last year that because of the magnitude of the unfolding of sub-prime and other mortgage-backed security implosion that my initial estimate is likely to be way too conservative.

If this scenario is to have any credence, then I would expect the price of gold to rise substantially from the current price, before any G-20 announcement. This is because just about all of the G-20 participants, spouses, aides, and friends would be buying gold in a panic to hoard as much as possible before the great price revaluation. Even if the G-20 agreed to keep a lid on it and not personally profit from it (yeah, right!) there would certainly be leaks. Heck, if I knew this was going to happen and I knew the timing of the announcement and the price to be set, I'd be borrowing and leverage my ass-ets to the absolute maximum.

The semantic difference here is the timing. If the price of gold is mandated to a substantially higher price by a collusion of governments, then (as long as I get to keep my gold and it is not confiscated away) then the lotto scenario would play. However, the environment that I envision is a slower, long term, natural price rise to the levels I already mentioned. Even if a decree price is the same level as what normal markets forces would come up with does not result in the same effect. The long slow market-driven price rise would be from a result of slow and deliberate Dollar debasement. In this situation, the price of gold is not a lotto jackpot, it is only just maintaining of existing wealth. That is really all gold is good for... holding onto and maintaining wealth over long periods of time or even across multiple generations.

1929 Revisited - The Greatest Bull Market in History This is the title of an online e-book written by by Martin Armstrong. I had several CyclePro readers request information about parallels with 1929, so I decided to provide Martin's full account of the era from 1920-1940. The following are the links to each chapter PDF file:

Who is Martin Armstrong? For that I will direct you to this article on Seeking Alpha which describes Armstrong's history along with his newest treatise, called "It's Just Time" - The Decline & Fall of the United States? The Global Financial System? Or Capitalism?. This treatise is rather long but a good read. Students of cycle theory should be especially interested in reading.

Sunday, November 2, 2008 PM
To my list of banks most likely to fail, last week I added Alpha Bank & Trust, Alpharetta, GA and this week I added Freedom Bank, Badenton, FL. Both of these banks were FDIC seizures, but small cheese when compared to one the size of National City. PNC Financial agreed to buy out National City last week for $5.2B, of which PNC received $7.7B bailout from the Fed.

So now we see a small portion of the real purpose of the 2008 Bailout plan starting to be exposed. Instead of headline FDIC seizures of large US banks, the Fed will provide bailout cash so another bank can buy out the insolvent one. Essentially National City was insolvent and was in line to be seized. But that makes too much noise in the media like when Washington Mutual was seized on September 25, 2008. So the end result is roughly the same, it's just that now the FDIC is working jointly with the Fed to devise a bailout, not to the insolvent bank, but to another bank that merges them in a stock buy out. This process allows the buying company to issue new stock without causing immediate dillution to their float. And, it keeps the FDIC balance sheet from running out and needing Fed replenishing. In this latest deal, the US Treasury bought $7.7B in PNC stock at current market prices while PNC paid 19% less than the market stock price for National City. No shareholder approval necessary since the Bailout provisions allow the Tresaury & Fed to sidestep these securities laws. Basicially, the message from the Fed to the National City shareholders is, be happy you got anything since a formal bankruptcy and seizure would otherwise render your stock worthless.

Isn't it interesting that a bank like National City who listed total assets of $141.5B and equity of $16.7B as of 9/30/08 (assets of $151B and equity of $18.4B as of 6/30/08) yet get bought out for only $5.2B? How many more banks are telling lies to their shareholders? Ben Bernanke has been fighting hard to reverse the accounting rules that require marking assets to market values (mark to market). As US taxpayers are footing the tab for more bailouts, is the Fed buying these assets at the lie price or the real market price? Bernanke's moves suggest we are paying for the lies.

The US Treasury has spent $157B so far, out of a planned $250B, to buy assets (preferred stock and warrants) from major banks in its ongoing program to nationize the US banking system (see table below). Oh, of course the Fed is not saying outright that nationalization is the goal, but what else does it mean when the US Treasury is shareholder and takes ownership of board positions at these banks? From here out out, sleeping with the devil has its price, these banks are no longer independent since having the US Treasury on their board can and will enforce their own policies.

This list represents the Chosen Ones, the banks that the Fed and US Treasury have deemed as the ones they want to have survive the current financial turmoil. Each of these banks have joined the dark side of the force to receive cash infusions to save their butts. As a result, these banks will be the ones that will eventually gobble up many of the remaining near-insolvent banks. There will be many top quality banks that will resist the temptation of jumping aboard this gravey train of supposed easy money -- the attached strings are what will keep prudent institutions away. But in the end, independent banks will be too small, too weak, to compete against the big banks that have virually unlimited Fed backing.

Non-bank companies are also trying to get on this elite list. GMAC for example is actively trying to change their charter to become a bank -- just like Goldman Sachs and Morgan Stanley did -- to jockey for position to get a slice of this tempting bailout pie before it is all eaten up.

Detroit's big 3 auto manufacturers have already received $25B but they want more -- GM and Ford have financing subsidiaries charted as "thrift holding companies" so that makes them eligible as a bank and they are already lobbying for another handout. Other industrys such as Macy's and General Electric also have financing subsidiaries, so that means anyone with even a remote definition of financing, will be squirming their way to the Fed's doorstep, and this is no trick or treat. I expect more companies to apply to change their charters so they too can participate in the fun.

It is clear by recent revelations, the bailout cash is not being used to enable average citizens to have better access to lending facilities. I have found no evidence that lending opportunities have improved over the past month or so. Instead the bailout is being used to enable the chosen ones to continue their corporate agendas of acquisitions and executive bonuses. It seems everyone, beyond banking, wants in on the gravey now that the secret is out. Taxpayers are still on the hook for this entire bailout, yet very little if any, will actually be used to free up the frozen lending facilities.

It is a CyclePro forecast that over the next 5-8 years, there will no longer be any more regional banks, they will all be merged with national banks. Either they too will join with the dark side and benefit from the brotherhood of Fed backing (at a cost), or join with large independents that will constantly struggle with low margins and unfair competition as rules will constantly change in favor toward complete nationalization.

US Institutions Receiving Fed Bailout(as of 10/27/08)

Institution

Bailout

Bank of America(merger with Merrill Lynch)

$25 billion

Bank of New York Mellon

$3 billion

Capital One

$3.55 billion

Citigroup

$25 billion

City National Corporation

$395 million

Comerica Incorporated

$2.25 billion

Fifth Third Bancorp

$3.4 billion

First Horizon National Corp.

$866 million

First Niagara Financial Group, Inc.

$186 million

Goldman Sachs

$10 billion

Huntington Bancshares

$1.4 billion

JP Morgan

$25 billion

KeyCorp

$2.5 billion

Morgan Stanley

$10 billion

Northern Trust Corporation

$1.5 billion

PNC Financial(merger with National City)

$7.7 billion

Regions Financial Corporation

$3.5 billion

State Street Corporation

$2 billion

SunTrust Banks

$3.5 billion

UCBH Holdings, Inc.

$298 million

Valley National Bancorp

$330 million

Washington Federal

$230 million

Wells Fargo

$25 billion

Sunday, October 12, 2008 PM
Wow, what a week for stock markets around the world. Is it over? I wish I could say with certainty, but nowadays with government bailouts and market intervention "...anything unexpected can happen when you least expect it" (Yogi Bera).

As I mentioned in my brief update Fiday night, the threat of the US government declaring ML was a very real opportunity, but they apparently chose not to do so. This is a good thing for all Americans. Although I remain vigilant in monitoring the situation, I am less fearful that there will be another confluence of events so perfectly set up for ML as what we had over the past 2 weeks.

The big IF remains with events that can quickly trigger mass panic. One of the easiest is to chose to not intervene in a severe stock market sell-off. For example, if the DJIA lost more than 1100 points causing the NYSE circuit breakers to kick in. Or worse, a 20% or 30% loss (-2200 or -3350 pts, respectively) that cause all US stock exchanges to shut down.

Gold and silver do not appear to be playing their traditional role during financial crisis. Or are they? When you look at the lease rate charts you get a very different story. While the rates only hit 3% this week, they could go much higher as the availability of physically deliverable metal gets even tighter. It has been 7 years since the previous massive lease rate spike occured and that took the rate to over 7% and 1999's spike was almost 9%. These high rates only occur when there is a severe imbalance between physically available metal vs short traded paper gold. By "paper" I mean futures contracts and options and other derivative products that trade on the price of gold but do not directly involve physical delivery.

As an example, an arbitrageur might try to borrow physical gold or lease it from a bullion bank, sell the metal in the physical market, and then use futures (or other derivatives) to buy back at lower prices. Right now that is feasible since the physical price (spot plus a hefty premium) is much higher that the published spot price. The spot is based upon the trading of paper gold, not physical. If the abritrageur cannot obtain enough physical gold to give back to whomever they borrowed or leased from they have no choice but to go back to the lease market to get their gold, but only after having to pay a higher lease rate to do so. The tighter the availability of physical metal gets, the wider the discrepancy between physical gold and paper gold, and the more aggressively arbitrageurs will try to capture the difference in prices. If they can acheive it, their gains are substantial. If they fail, they lose a lot, and possibly default.

I think we are getting closer to the moment when the arbitrageurs fail. The closer we get, the higher the lease rates get. This will reflect not only the price gap between physical and paper gold, but also the widening risk abritrageurs are willing to take to capture that price differential. Also, as the gap gets wider and lease rates rise, many arbitrageurs will try to make larger and larger trades to profit more on larger volume than on merely price alone.

The gap between paper and physical gold must close. During last weeks financial crisis the paper gold sold off along with deleveraging liquidation of other paper assets. However, physical gold price did not change and most likely went up. There is no benchmark price to measure physical gold, but for what I was hearing, retail buyers were screaming at trying to buy physical metal that simply was not available at any price.

The gold (and silver) price will eventually reassert a more realistic price level than what we are seeing right now in the paper markets. I am guessing that it will be sooner rather than later... perhaps before the end of the year. From the long term lease rate charts the 1999 spike took severall more months from when it reached current levels and the 2001 event spiked very quickly.

The calendar seasonality of gold shows a tendency to stall out during the 1st week of October with falling prices through the month. Early November is the timeframe for the next seasonal low and beginning of the year end rally.

Interesting Developments in Gold: The following DJIA/GOLD chart shows that the
ratio is following the anticipated cycle very well, although quicker than expected. With this weeks DJIA sell-off the DJIA/GOLD ratio hit a low of 10:1. My long term target is 2:1 (Richard Russell says he expects the ratio to hit 1:1). When CyclePro first started posting this chart in 2002, the ratio was in the 30's.

A very surprising thing happened this week that I did not anticipate, at least not to this extent. The price of silver fell very hard relative to gold. While silver is considered "poor man's gold" and always takes a back seat to the monetary leader gold, the silver selloff was substantial. The following chart shows that the GOLD/SILVER ratio has moved way outside of our expected cycle pattern. This does not negate the trend, but draws into question whether it will eventually play out as expected by its termination in 2013-2015. If it does then relative to gold, silver is a screaming buy here as this spike up should be of a very short duration. I am not saying buy silver necessarily, I am saying that if you are wanting to buy precious metals and need to decide whether gold or silver is the best choice, consider silver as it has the better outlook for percentage gains.

The last time the ratio was this high in 2004 was when I started suggesting investors weight their precious metal purchases more on silver than gold. That strategy worked very well until this year. I did not see the ratio reversal coming quite this hard.

What is behind all of this precious metal selling in light of the current financial crisis?
There is a huge discrepancy between the paper gold market and the physically delivered one. Check for yourself, call a few of the metals or coin dealers in your area and see how much "bullion" gold they have available for sale, and if they have any how much is the premium over spot price? I will bet that any gold they have to sell is coins with collector value rather than pure bullion gold and at substantially higher premiums. I have been hearing that dealers are selling silver for as much as 50% over spot... if they have any to sell. Also, check out eBay -- these tend to be higher than normal premiums, but right now the premiums are huge -- and people are apparently willing to pay in order hold the real thing in their hands.

The US Mint did not discontinue fabricating and selling Eagles and Buffalo coins because of "unpresedented demand". If you look at the history of Mint sales you will see that 1998-1999 years sold 2x-4x more coins than 2008 (1999 was 1.5M 1oz coins vs 433K so far in 2008 and 149K in all of 2007). No, the problem is that they cannot obtain enough physical delivery with which to make the coins. No one is selling their physical gold... only paper gold (futures and devative products) is selling and that is the price that you are seeing as the spot price.

As I discussed earlier, the lease rates are starting to show the strain, and that stress is likely to crack sometime very soon. The calendar seasonality of gold chart suggests the lease market may remain tight through October but the real pressure may heat up toward late Novermber, 2008. This is most likely time for a dramatic price spike upwards. Keep an eye on the lease rates for guidance.

The gold mining stocks have taken a beating too. The juniors have been especially hit hard. My strategy right now is to sift through the carnage and pick out a few of those with substantial reserves in the ground, not the explorers that are all talk and no product, and consider them to be the equivalent of an unexpiring call option on gold. Their prices are so depressed -- and yes, they can still go lower -- are currently in the "bargain" range to begin a new accumulation phase. If they are sound miners with great reserves then I am buying now and will add more if they go lower. Producing miners require a lot of energy and were hampered by high crude oil prices. In the coming environment of lower energy prices (crude is now below $80) these producers can acheive much better returns.

Stocks: Even the "Tower of Terror" ride at Disney World (Orlando, FL) does not have a free-fall drop as much as the DJIA fell at times over the past week. It almost makes you think twice about eating a big meal before getting aboard the DJIA rollercoaster.

Taking a very long term look at things I pull out my updated 200 year chart and some zoomed-in charts of the current situation. The top is CyclePro's most noted chart. This is a 200 year history of US stocks with yearly Hi-Lo-Close bars all adjusted for BLS inflation rates. As is easily visible on a log scale chart, stocks stay within a consistent channel through its entire history. Each time it touches or pierces the upper channel, eventually it moves to the lower channel, and vice versa. There is even a higher channel line (orange) that has only been touched in 1929, 2000, and 2007. The lowest channel line (orange) has only been touched in 1813 and 1982. The 1900-1906 double touch was followed by a bear market through 1920. The current 2000-2007 double touch may follow a similar pattern. My target is actually 2016-2018. Even the 1906 bear market initially came down to the centerline, bounced up, and then fell through several years later. I expect the same to happen this time around with my target no later than 2012 -- but maybe we are already there...

Zooming in on the later part of the chart, the following shows 1962 forward. This chart is a linear scale (so the channel lines appear curved). The top chart is also adjusted for inflation using 2000 as the base, but it is using the data from the BLS (Bureau of Labor Statistics). From the vantage point of inflation-adjustment we can see how the 1987 crash compares with this weeks sell-off. My former target was 5600, but I'd be satisfied to see anything around the 6000 area depending upon whether it hits earlier or later.

The same exact zoomed in chart as above, but with inflation data from John Williams at ShadowStats.com (SGS) shows that the centerline has already been hit, not just hit, but stabbed, and almost reaching for the lower channel already. Even the October, 2007 rally that made new all time highs for DJIA appear extremely weak by comparison.

Ok, I may be a stock bear, but I seriously doubt US stocks are already near a bear market low. First of all, the timing is way too soon. Second, although I greatly respect John Williams' commitment to accuracy, I do not believe current inflation is as high as his statistics say it is. In previous CyclePro articles I mentioned how my own unscientific observational local analysis suggested real inflation was more like 2/3 of SGS... but certainly much higher than BLS!

The BLS inflation rate is way too low and the SGS inflation is way too high. Without having reliable statistics, it is difficult to really assess the progress and extent of the overall bear market.

The real bottom for the current US stock bear market is not expected until August, 2017, as the following chart demonstrates with the very consistent 17.6 year cycle. This chart is also adjusted using SGS inflation data.

If the SGS inflation data is accurate, then what may happen is a repeat of the 1932-1948 sideways triangle. There were big rallies and smaller bear markets, but by 1948, the inflation-adjusted DJIA made very little real progress.

And, I should also point out that a buy-and-hold investor in 1932 that picked the absolute low to buy a basket of DJIA stocks probably would have lost money through 1948 because of the fact that the DJIA has a survior bias. That means the component stocks that make up the DJIA are routinely changed such that dogs are replaced with current leaders. In order for a 1932 investor to make anything by 1948, he had to constantly manage his portfolio to exactly match the same component mix as the DJIA all along the way. Althougth the inflation adjusted DJIA went from 469 to 774 (a +65% increase) it took 16 years to get there and the buy-and-hold investor had to endure 2 massive rallies (1932-36 from 469 to 1684 +250%, and 1942-46 from 700 to 1440 +100%) and 2 smaller bear markets (1936-42 -58%, and 1946-1948 -46%). I think we will experience similar roller coaster DJIA rides between now and 2016-2018.

Real Estate update: The Miami real estate market is continuing to fall. There are signs that the rate of fall may be slowing. I attribute this phenomenon to bargain hunters trying to catch falling knives by playing the foreclosure and bank auction angle. The buyers are mostly vulture investors, not families. Anyone who wanted to buy a house already did, so there are very few family buyers right now. Once the investors get their fill, and with the lack of homeowner-buyers the markets are likely to resume their fall again. The Miami market got way out of whack relative to the rest of the US. That misalignment reached a high of $59,000 above the Case-Shiller 20-city index in 2007 and has since come closer into step with the 20-city by falling -85% of the spread to where it is now only $8,400 higher.

By comparison, the following chart shows the Case-Shiller indices for 20-City composite, 10-City composite and Miami. These have now fallen from 2006-2007 peaks by -19.5%, -21.1%, and -33.4%, respectively. The CyclePro forecast for real estate is on track and continues to anticipate a 20-City composite decline of closer to -40% and a worst case -50%.

US households continue to tread even tough about 5M mortgages are underwater. The total US residential mortgage debt outstanding is still growing, however the difference betwen Q1'08 and Q2'08 is very slight. The average mortgage debt per household is still around $341K and the total of all US mortgages is steady as $12.1T. I expect the total debt to decrease somewhat as the new $700B bailout is supposed to help homeowners re-work their mortgages at lower market values. As you can see by this chart, even if the $700B bailout was devoted exclusively for US residential mortgage holders, it is only a tiny blip on the chart. Throwing the entire bailout bucket into the mortgage debt fire only takes it back to 2006 levels. 2006 was the peak of housing prices for most parts of the country. Since my housing forecast above suggests home values could drop by up to -50% from their peak, a US Treasury backed bailout of underwater US homeowners would require at least $6T -- that's at least 8.5 times the current $700B bailout budget!

Our Congressmen and Senators are trying fevorishly to stop the pain across the entire spectrum of financial products. One quote I heard recently is a perfect analogy, "trying to intervene with $700B to help banks, businesses, homeowners, student loans, credit cards, auto loans, yada, yada, yada... is like putting a band-aid on a cancer patient and then telling them and their family that everything has been fixed".

While I have tried to keep the politics in CyclePro down (oh yes, I have been a Bush basher since 2000, but go ahead and tell me I was wrong, ok) I cannot help but to make a plea for you to consider for this coming November election. Look through this list of Congressmen and Senators that voted in favor of the bailout plan. Find the ones that represent you in your state and congressional district. Then, come November 4, 2008, vote for the other candidate regardless of political party. Every one of these representatives are without sufficient cranial capacity to understand the financial morass that we are in right now. We urgently need smarter people to make smart decisions. The $700B bailout has been done -- a loss we will have to eat, but a drop in the bucket for how much we might eventually have to spend -- we need to make sure that the new representatives are smart enough to take proper action.

I think Karl Denninger has done as excellent job of outlining key factors that need to be considered before making any more major decisions about this financial mess. There may be other factors to consider, but I think Karl's list is a great starting point. His current tome is what he calls the "Genesis Plan" and has the following 3 main components:

Everyone must expose their balance sheet; all Level 2 and 3 assets must be declared and all models disclosed in full immediately and every quarter hereafter.

The CDS monster must be caged by forcing it onto an exchange where supervision and oversight can be maintained. (ICE has already started working toward this and I expect other exhanges to propose competative solutions)

Bank leverage must be returned to no more than 12:1 across the system - no exceptions.

The prospect of a declaration of martial law did not occur today, although conditions were again ripe for it to happen. I think the fact that the stock markets all closed nearly unchanged helped to change the tone. I really think that another huge sell-off that triggered NYSE circuit breakers could have been a trigger for ML too. It did not happen so once again we escaped another severely ripe opportunity. I am very pleased we did not slip into our country's worst nightmare.

Friday, October 3, 2008 PM

Another List of Possible Bank Failures; The following is a table of the top 130 US banks that are, in my opinion, most vulnerable to failure out of the 8600 banks for which I have performance data. The statistics used are current as of June 30, 2008.

The column headings have the following definitions:

E/A

Equity / Assets

IM

Interest Margin

NPA/A

Non-Performing Assets / Assets

NPA/ELR

Non-Performing Assets / Equity Loss Reserves

ROE

Return on Equity

RBCR

Risk-Based Capital Ratio

TC/TA

Tangible Capital / Tangible Assets

Assets

Total bank assets

Rank

Overall Rank

The table includes banks of all sizes whose performance data is the worst of each of the seven categories. To develop this list I found the top 75 worst banks of each category, ranked them, and then grouped them by a calculation that grouped these rankings across all seven categories from most worst to least worst. The ranking gives a higher value to banks that hit multiple categories and a lower value for those that only hit one or two categories. For example, the #1 worst bank in my list is Ameribank and #4 is Integrity Bank, both of which have already been seized by FDIC.

I have no idea which of these banks will actually be seized. And it is quite possible there will be FDIC seizures for banks not on this list. For example, on a scale of 1 to 5 (1 being best to 5 being worst) IndyMac was ranked a 3 just before they were seized. FDIC maintains a watchlist of the 117 most vulnerable banks for which I'd like to think I have most of them in my list here. But in the environment were now find ourselves, I believe this list of bank are more likely than not to be seized. Before all the dust settles over the next 6-12 months, many of these banks are likely to go under.

US Banks - Highest Likelihood of Failure

Institution Name

E/A

IM

NPA/A

NPA/ELR

ROE

RBCR

TC/TA

Assets

Rank

Ameribank, Northfork, WV* Seized by FDIC 9/19/08

4

2

3

5

4

3

104M

1

First Priority Bank, Bradenton, FL* Seized by FDIC 8/1/08

1

23

2

6

1

1

258.6M

2

Main Street Bank, Northville, MI* Seized by FDIC 10/10/08

3

12

3

5

5

112.4M

3

Integrity Bank, Alpharetta, GA* Seized by FDIC 8/29/08

6

3

4

1

16

13

9

1.1B

4

Fulton Financial Advisors, NA, Lancaster, PA

2

1

46.5M

5

Nebraska Rural Comm, Morrill, NE

1

1.4M

6

Wellington Trust Co NA, Boston, MA

1

87.2M

7

Security Bank Of Gwinnett County, Suwanee, GA

8

6

5

7

369.2M

8

BBM, Birmingham, AL

1

5

1.3M

9

Ebank, Atlanta, GA

7

4

26

11

18

137.8M

10

Eastern Savings Bank, FSB, Hunt Valley, MD

1

6

1.1B

11

American Sterling Bank, Sugar Creek, MO

5

29

2

8

258.1M

12

Port Trust, Charleston, SC

2

<1M

13

Imperial Savings & Loan Assn, Martinsville, VA

2

72

24

15

3

2

9.3M

14

Fremont Investment & Loan, Anaheim, CA

11

6

56

26

14

22

23

5.7B

15

Strategic Capital Bank, Champaign, IL

13

15

7

675.8M

16

Citizens Comm Bank, Ridgewood, NJ

9

19

10

19

46.4M

17

Alpha Bank & Trust, Alpharetta, GA*Siezed by FDIC 10/24/08

13

14

12

383.2M

18

Magnet Bank, Salt Lake City, UT*Siezed by FDIC 1/30/09

5

7

24

30

344.8M

19

Mayes County, Pryor, OK

3

21M

20

First Natl Bank Of Nevada, Reno, NV* Seized by FDIC 7/25/08

31

31

2

9

3.4B

21

First Georgia Comm Bank, Jackson, GA* Seized by FDIC 12/5/08

11

17

18

263.6M

22

Morton Savings Bank, Morton, PA

10

42

27

27

21

18.3M

23

Bankfirst, Sioux Falls, SD

3

10

346.3M

24

Platinum Comm Bank, Rolling Meadows, IL

18

8

26

32

80.2M

25

Security Pacific Bank, Los Angeles, CA* Seized by FDIC 11/7/08

21

28

4

587.7M

26

Freedom Bank, Bradenton, FL* Seized by FDIC 10/31/08

23

12

6

45

284.1M

27

PFF Bank & Trust, Pomona, CA* Seized by FDIC 11/21/08

46

25

9

35

31

4.1B

28

Rivergreen Bank, Kennebunk, ME

17

7

31

97.9M

29

Ocala Natl Bank, Ocala, FL* Seized by FDIC 1/30/09

24

11

31

28

258.3M

30

Bethany Baptist, Farmingdale, NJ

3

13

<1M

31

Bright Hope, Philadelphia, PA

7

9

<1M

32

First Century Bank, NA, Gainesville, GA

14

19

27

45.9M

33

Mellon Bank, NA, Pittsburgh, PA

4

39.5B

34

Sterlent, Pleasanton, CA

4

88.9M

35

Wells Fargo Bank, Ltd., Los Angeles, CA

4

305.2M

36

Alliance Banking Co, Winchester, KY

24

20

14

46

55.4M

37

First St Bank, Danville, VA

16

19

30

27.3M

38

Comm Bank, The, Loganville, GA* Seized by FDIC 11/21/08

8

10

628.1M

39

Ameriprise Bank, FSB, New York, NY

8

11

1.5B

40

Bishop De Mazenod, Houston, TX

2

17

<1M

41

Lewiston Catholic, Lewiston, ID

4

15

<1M

42

Allst Bank, Vernon Hills, IL

15

30

28

923.3M

43

Fifth Street Baptist Church, Richmond, VA

5

<1M

44

High Desert, Apple Valley, CA

13

7

157.6M

45

Putnam Fiduciary Trust Co, Boston, MA

5

378.1M

46

Silver St Bank, Henderson, NV* Seized by FDIC 9/5/08

34

33

18

35

2B

47

St Bank Of Lebo, The, Lebo, KS

28

15

32

25.5M

48

Depository Trust Co, The, New York, NY

30

10

37

50

3.6B

49

C M A, Bham, AL

12

10

4.5M

50

Newton County Loan & Savings, FSB, Goodland, IN

10

34

41

7.3M

51

Ing Bank, FSB, Wilmington, DE

12

58

17

79.5B

52

Home Town Bank Of Villa Rica, Villa Rica, GA

7

17

224.5M

53

Wells Fargo Bank, NA, Sioux Falls, SD

6

503.3B

54

First Security Natl Bank, Norcross, GA

9

16

147M

55

Omni Natl Bank, Atlanta, GA

52

35

32

36

1B

56

Circolo Campobello Di Licata, Amherst, NY

14

12

<1M

57

Vineyard Bank, NA, Rancho Cucamonga, CA

39

40

38

41

2.3B

58

First Frontier, Lynbrook, NY

6

21

<1M

59

Downey S&L, F.A., Newport Beach, CA* Seized by FDIC 11/21/08

33

35

34

12.6B

60

American St Bank, Tulsa, OK

68

70

59

43

64

70

11.1M

61

Franklin Bank, S.S.B., Houston, TX* Seized by FDIC 11/7/08

46

43

37

42

5.6B

62

Westsound Bank, Bremerton, WA

7

428.5M

63

Alliance Bank, Culver City, CA* Seized by FDIC 2/6/09

50

36

51

32

1.1B

64

Firstcity Bank, Stockbridge, GA

16

13

255.4M

65

West Hartford, Farmington, CT

8

22

3.8M

66

Citizens Natl Bank, Macomb, IL

21

10

461M

67

Mutual Bank, Harvey, IL

44

39

34

1.7B

68

Farmers Bank, Lincoln, NE

63

68

58

61

63

19.5M

69

Pacific Western Bank, San Diego, CA

8

4.3B

70

St. Helena Parish, Chicago, IL

10

23

<1M

71

Metlife Bank, NA, Bridgewater, NJ

39

52

36

7.7B

72

Home Fed Savings Bank, Detroit, MI

48

66

36

54

16.5M

73

St. Gertrude'S, Mora, NM

26

8

1.7M

74

St. Margaret, St. Louis, MO

15

20

<1M

75

Bestwall Brunswick, Brunswick, GA

9

<1M

76

Redwood Bank, Watertown, NY

9

18.3M

77

Security Bank Of North Fulton, Alpharetta, GA

9

182.5M

78

Universal Savings Bank Fa, Milwaukee, WI

75

20

40

4.3M

79

Westernbank Puerto Rico, Mayaguez, PR

50

35

54

17.1B

80

Los Padres Bank, Solvang, CA

41

49

51

1.2B

81

First United, San Jose, CA

32

6

17.8M

82

Texico St Bank, Texico, IL

70

48

38

72

9.4M

83

Centennial Bank, Ogden, UT

12

27

212.3M

84

Jennings St Bank, Spring Grove, MN

19

20

47.9M

85

Security Savings Bank, Henderson, NV* Seized by FDIC 2/28/09

18

21

254.5M

86

Corus Bank, NA, Chicago, IL

62

40

45

9B

87

Almena St Bank, Almena, KS

58

33

58

16.2M

88

Alliant Bank, Sedgwick, KS

45

50

55

16.7M

89

Comm Trust Bank, Hiram, GA

13

27

279.4M

90

County Bank, Merced, CA* Seized by FDIC 2/6/09

58

49

43

2.1B

91

Southern Comm Bank, Fayetteville, GA

22

18

378.1M

92

Bank Of Parsons, Parsons, KS

44

55

53

11.8M

93

Guaranty Bank, Austin, TX

27

15

15.9B

94

Real Financial, Edina, MN

31

11

28.3M

95

Farmers St Bank, Fairmont, NE

38

48

74

7.3M

96

Mesilla Valley Bank, Las Cruces, NM

36

60

64

17.3M

97

Bankunited, FSB, Coral Gables, FL

57

46

58

14.2B

98

Alliance Of Poles, Cleveland, OH

18

25

<1M

99

Bear Stearns Bank & Trust, Princeton, NJ

11

879.9M

100

First Bank, Roxton, Texas, The, Roxton, TX

59

72

74

59

19.9M

101

First Private Bank & Trust, Encino, CA

11

638.8M

102

Mt Zion Woodlawn, Cincinnati, OH

11

<1M

103

Nova Savings Bank, Berwyn, PA

29

16

520.1M

104

Mcclave St Bank, Mcclave, CO

75

73

57

67

19M

105

Meridian Bank, Eldred, IL* Seized by FDIC 10/10/08

8

38

44.2M

106

Riverside Bank of Gulf Coast, Cape Coral, FL* Seized by FDIC 2/13/09

25

21

620.5M

107

Filley Bank, Filley, NE

56

62

56

15.1M

108

Freeport St Bank, Harper, KS

57

60

57

16.2M

109

First St Bank Of Altus, Altus, OK

31

16

124.5M

110

Delaware Sterling Bank & Trust, Christiana, DE

12

32.3M

111

Neighborhood Comm Bank, Newnan, GA

26

22

240.1M

112

Old West, John Day, OR

29

19

90.6M

113

Heritage Comm Bank, Glenwood, IL* Seized by FDIC 2/28/09

25

24

263M

114

First-Knox Natl Bank, Mount Vernon, OH

21

29

818.8M

115

Bank Of Wyandotte, The, Wyandotte, OK

67

58

69

12.7M

116

Colorado FSB, Greenwood Village, CO

13

99M

117

Pnc Bank, NA, Pittsburgh, PA

13

128.3B

118

Citizens St Bank, Carleton, NE

62

73

62

12.1M

119

Anchor St Bank, Anchor, IL

71

54

73

13.7M

120

Oglesby St Bank, Oglesby, TX

69

59

71

12.1M

121

Bank Of New York, The, New York, NY

34

20

130.1B

122

Milford B & La, Milford, IL

66

72

68

18.8M

123

Central Progressive Bank, Lacombe, LA

14

480.9M

124

Rocky Mountain Bank & Trust, Florence, CO

19

37

212.2M

125

Sc Firefighters, Columbia, SC

14

3.7M

126

University Bank, Ann Arbor, MI

14

113M

127

Kaiser-Lakeside, Oakland, CA

33

24

28.5M

128

Valley Wide, Vernal, UT

28

29

<1M

129

Oakdale St Bank, Oakdale, IL

72

75

74

16.7M

130

Possibility of Martial Law At least one Congressman admitted that he was told that not passing the bailout bill could result in the declaration of martial law. I concur that this was a very real possiblity. If the bill had not passed, the stock market would likely have dumped hard, similar to what happened last Monday. While there are many that suggest the PPT would step in and support stocks to keep them from falling, I disagree. It depends upon what the Presidents Working Group on Financial Markets wants to accomplish. Last Monday was an example where it was clear there was nothing supporting the market. In fact, I believe the selloff was stronger to the downside because short selling was not allowed on the 800+ financial stocks. When a short-seller needs to exit their position, they must buy it back and that creates support. Without shorts being there to buy back their own positions, there was a shortage of buyers and that causes stocks to drop much faster than normal. You have witnessed first hand what happens when the stock market becomes less liquid because of poorly conceived government regulations -- an aftereffect of the law of unintended consequences. Public opinion of the bailout quickly shifted from opposition to acceptance following Mondays min-crash -- it is amazing how quickly Americans can be herded like sheep when their pocketbook is immediately threatened. A stock panic today of similar magnitude would certainly have helped set the stage for a martial situation.

If it was going to happen, this weekend was the very best opportunity. Because the bailout bill passed the House, I do not think the likelihood has disappeared, rather I think it has simply stepped aside awaiting the next opportunity. Here are the points that I have identified as necessary before martial law is likely (and this of course is my worst nightmare):

Bush signed an executive order in Spring, 2007 authorizing the sitting President to suspend Constitutional government indefinitely in the event of a catestrophic emergency (the definition of emergency is up to the President to decide).

I interpret the executive order that in such an emergency Bush will have the power to temporarily "nationalize" corporations deemd to have strategic national importance, such as banks, oil, airlines, food distribution, etc.

US Elections could be suspended indefinitely (again, timing is everything so a move sooner is more likely than waiting as few weeks)

A few months ago Bush reassigned the US Army 1st Batallion from Iraq to US to train for "domestic operations" and to be on-call beginning 10/1/08 to quell riots and public unrest.

US Treasury has the authority to do just about everything in Paulsons original bailout proposal... in the event of an emergency. Anything not specifically authorized may be granted to the Treasury by the President. This includes confiscation of gold, silver, and any other commodity deemed necessary in support of the US financial and banking system.

The strategy of FDIC announcing bank seizures on Friday nights, sets up a perfect backdrop and maximum drama for Bush to declare such an emergency this weekend. I would expect the next FDIC announcement to be many banks at one time.

Quite possible he might declare a "bank holiday" and keep banks closed for several days.

Failure for Congress (damned if they did and damned if they didn't) to pass the bailout bill allows Bush to hold Congress up as the scapegoat to blame for the crisis and therefore justifying his need to declare an immediate emergency.

If Bush wants to leave office with maximum impact, this is a golden opportunity for him to make his move.

This is a nightmare scenario that I truely hope does not come to pass. I think the pressure is off for the time being because the House did pass the bailout bill. President Bush has already signed it. The new bill has gone from Henry Paulson's initial 3 page document to 450 pages, full of add-on's and pork. A declaration of martial law by Bush may not happen this weekend, but the possibility still exists and if it happens is most likely before November's election. Stay tuned.

Sunday, September 21, 2008 PM

Short-Selling: The new SEC ruling has halted all short-selling on 799 financial companies effective immediately and continuing through 2 October 2008, but the halt may be extended to no more than 30 days beyond that. I find it quite peculiar that 2 October + 30 days = 2 November, which is just 1 trading day before the US election. No new shorts may be initiated, but for those that are already short have no choice but to buy to close out their position. This creates an artificial rally, but only if there are buyers.

The problem was from naked short-sellers. In other words, primarily hedge funds, would sell a stock short without borrowig it first. It was purely financial machination of a derivative nature that only limited their leverage by the margin required by their trading counterparties. With this extreme leverage, funds could drive down the stock price of any company or commodity. For the financial stocks, it was particularly devious because much of quality rating is based upon stock performance. An investment bank, like Lehman for example, would be able to trade with counterparties at certain credit rating levels while posting appropriate margin. Once their rating is lowered, their credit quailty immediately comes into question and it is no longer a speculative decision to request more margin from Lehman, but a contractual one. When a companies credit rating is lowered, the stock price tends to fall more. And that fall could trigger another credit rating downgrade. It very quickly becomes a death spiral. Naked short-selling is not illegal, but predatory and intentional manipulation to artificially move stock & commodity prices is illegal. Hedge funds have gotten so large and powerful with huge sources of cash that their influence in markets has been very unsettling. As momentum players, once a stock or commodity starts to move (in ether direction) other funds pile in and that greatly exagerates the move.

James Angel (finance professor at Georgetown University in Washington) said on short-selling: "When you see flies around a carcass, it doesn't indicate that they killed the animal. They're just trying to make dinner out of it."

Traditional shorting is a necessary component of a properly functioning and efficient marketplace. Investors must be allowed to buy a stock just as easily as selling it. Without shorting, markets will skew with a very unnatual upside bias. At some point, there will simply cease to be any more buyers so those that hold stock will not be able to sell -- there will be a void in liquidity that eventually will drop the stocks price dramatically downward to a more realistic level. What this means is that a stock who used to trade a $1 daily price is likely now to trade in $2 or $3 swings -- the longer this short-selling suppression remains expect ever-widening daily swings. Potentially a great opportunity for nimble traders that don't mind surfing in shark infested waters.

Instead of banning all shorting, the SEC should have banned only naked short-selling and sought the parties responsible and prosecuted them. The SEC is starting to monitor daily shorting positions like they used to do for long positions. Geez, this is just common sense, SEC is supposed to be regulators and they didn't even consider short selling an issue worthy of monitoring? At least now both long and short positions are supposed to be publically reported to investors.

Goldman-Sachs - Last derivative standing?: Selling CDOs from one trading group while shorting them in another... sounds to me like Goldman knew what they were doing by getting their competitors loaded up with more poisonous paper (like the elderberry wine in Arsenic and Old Lace). As the last investment bank in what appears to be in surviveable shape, Goldman is in the perfect position to monopolize whatever business it can scrape up. David Viniar (Goldman-Sachs CFO) said that "Goldman has compassion for the employees of the failed firms (Lehman & Merrill), their bad fortune is a benefit (to Goldman) ... clearly when there is less competition it is better for us ... more pricing power and a competitive advantage." That is, of course, if there is any business to scrape up. Dick Bove said "If the markets do not recover, Goldman cannot come back, it has no ability to do better than the businesses it serves."

Goldman's core business model is almost identical to that of Enron. Enron primarily traded energy products while Goldman trades anything and everything. There was no derivative too exotic for them to play, in fact these guys created markets for many of the more bazaar and convoluted products. Their role in the market was to be the middle man that takes on deals from almost anyone, retains a transaction a fee, and then offsets that position to another counterparty. By offsetting each deal, Goldman/Enron remained financially neutral. This made them kind of like a pseudo-exchange for OTC (over the counter) derivative products -- they created liquidity that otherwise was almost non-existent. They were, in effect, market-makers, the go-to guys of last resort. Bear Stearns, Lehman, Merrill and Morgan-Stanley played similar roles. But maintaining financial neutrality is only a figment of academia. Once one or more counterparties default, everything changes. In Enron's case, it was PG&E's bankruptcy that started their unravelling. For Goldman, it is the basket of companies that have recently gone bankrupt. Their Cinderella world has shattered.

Morgan-Stanley is walking death -- they will not survive. Perhaps the recent bailout will put them on life support for awhile, but once the financial umbilical is pulled, their final collapse should follow soon thereafter.

The reason I said Goldman may be surviveable is due to their relationship with the Federal Reserve. Goldman is a stockholder in the Federal Reserve and that gives them extrodinary clout. Further, as the strongest of the two remaining investment banks, Goldman will probably be deemed too important to fail because they would be the sole independent market-maker for derivative trading. Of course their business model will have to change because I really think the entire OTC derivative concept will be disassembled and repackaged with some kind of exchange-like transparancy and SEC-expanded oversight.

One caveat to this, as pointed out by a recent discussion I had with JesseL at Jesse's Café Américain is that Lehman was also a stockholder in the Federal Reserve. And look where that got them. Actually they were just too far gone to be bailed out and were sacrificed to save the rest of the wolf pack.

Citigroup, Bank of America, and JP Morgan: In my opinon, Bank of America (BAC) is in a very similar position as Morgan-Stanley, but of their own doing. While they hold massive amount of derivatives on their own, they have taken on a tremendous amount of additional baggage from the likes of Countrywide and Merrill. Citigroup is also in a bind with their derivative exposure. JP Morgan - the pillar of banking excellence (?) - IS the Federal Reserve so there is no chance of a collapse from them.

I think there is a backroom plan abrew. The US financial system needs financial structure from a variety of firms. I think these three are the chosen ones to get whatever taxpayer bailout is necessary to ensure their survival. They will be allowed to gobble up all of the other failing banks. After the dust settles I hardly expect much from them in the form of competition.

AIG: If I am now a stockholder in AIG, I want a discount on my auto insurance!

$700 Billion Mortgage Bailout: For a hastily thrown-together plan such as this, $700 Billion provides a lot of room for fraud and corruption to siphon a portion of that off into personal pockets. We saw how Bush/Cheney assigned Iraq repairations exclusively to Halliburton without competing bids, so I thoroughly expect the same consideration here. Republican-backed corporations will be given exclusive access to participate in the management, dispersement, and siphoning of funds. There are no government agencies equiped to handle it all, it must be contracted out. Time is critical since the US election is only 6 weeks away and political pawns could soon be gone from office -- all of this good-old-boy infrastructure needs to be in place and operational before that happens, if there is any payback due, now is the time to do it.

What it really boils down to is that Hank Paulson has been granted sole power to administer the machinations necessary to try to arrest the current crises. He has been granted sole, and unquestionable, power to demand which institutions buy what and which institutions must sell. Bush is in a daze and cannot fathom what is happening and Congress is apparently just as clueless. As a result, the real power of the country has been turned over to 2 unelected persons: Hank Paulson and Ben Bernake. Bush no longer calls the shot, Hank does. Right now, you'd better hope they think you are friendly, because if you are a foe they have the power to bury you and you will not have any recourse.

Please be aware that the $700B is only just a starting budget. This is merely a limit to how much the Federal Reserve can hold on its books at any one time. Once various transactions are completed and this balance goes down, it is likely to be replenished over, and over, and over again.

How much do you think this will eventually cost? Well all you really need to do is go back to how much the initial cost estimate was to go to war with Iraq, $50 billion. We have already past the $800B mark (Iraq & Afghanistan combined) and heading much higher -- clearly more than 16x the original estimates. Now I must confess that the $50B estimate was artificially low because Bush simply would not accept any higher estimate -- although I recall Lawrance Lindsey's original estimate was for $100- $200B. From that figure to current Iraq estimates of closer to the Stiglitz estimate of $3T it may end up being at perhaps 15x.

At least this time it does not appear as though Bush is playing low-ball. He really can't, after all how much does he understand about high finance? He understands about getting high but does he know anything about finance like what we are dealing with... not even Bernanke understands it and had to ask for a primer from industry traders.

Karl Denninger acknowledged that the original 1980's S&L bailout estimate was $20B but ended up costing $160B. That's an 8x.

Given our recent history, I think a 3x may be way too conservative and a 5x downright scarey. But judging by our past in handling cost estimates during crises 5x should prove to be way too low. But just so we have something to work with, let's just say it will end up being 5x, or about $3.5 - $4T.

If that doesn't scare the pants off of you, then consider that this estimate is only just this particular bailout... there's still a lot more fit to hit the shan.

How much is $700B? Consider this from a gold perspctive... The US currently has 8136.2 tonnes of what the US Treasury classifies as "Deep Storage" gold. This translates to 287M ounces. At friday's closing spot price of $871.80 all of this gold is worth $250B.. only 1/3 of what Paulson is asking for this bailout. That's right, if the US were to sell off its entire cache of gold it would just barely make a dent in this initial bailout.

In fact if you considered all of the gold held by World central banks: 31,000 tonnes (as of 2005), it would only amount to $953B. If my estimates from above prove to be accurate, this amount would barely make a dent in the final cost -- we would have to come up with 3-4x more gold just to pay off this bailout.

Taking this one step further, world-wide annual gold production is 50M ounces. It would take 16 years of consistent gold production to total $700B.

The bottom line is that we need to recognize that this initial estimate of $700B is nothing compared to what the final cost will be. And that cost will reach far beyond everything financial. Even if it reaches $4 trillion or more, the ripple through the global economy will be be felt by just about everyone. The US middle class will be completely destroyed - they are the only ones paying taxes. But even those not paying taxes will be significantly affected as the tsumani of bailout-injected inflation wipes out everyone on low and fixed incomes.

Dillution of the Dollar is Inflation to Everyone Else: Last wednesday when the FED announced they were going to print and issue new Dollars as part of the inital bailout. Consider that the FED is not much different than a bank selling shares
to raise capital the only real difference is the FED's shares are called US Dollars. In every case of selling additional shares is dilution of shareholder equity. Once Dollar holders realize this, the USD will head down again - likely to new lows soon. This action by the FED to sell more Treasuries should send a signal to large Dollar holders around the World, if they have not already started, to lighten up on their USD exposure. The former standard reserve currency is no more.

Of all of the US banks that issued new shares to raise capital, how many were able to continue operating normally without further bailout infusions from the FED? Nope, I cannot think of any either. The FED has been there to backstop all of these banks. Who is going to backstop the FED? Not the US Taxpayer, the numbers are growing too huge for that, taxes cannot possibly cover the costs that the FED is going to burn through.

I know the situation is quite dire to say the least. But, is this IT? Is this move by the FED the pivotal stroke that will send the USA into inescapable insolvency? Is this the event that historians will always refer to as the moment when the last gasping possibility of recovery was snuffed out, and Depression II began in earnest?

Not sure how the rest of you feel, but I see this latest FED move as THAT key pivotal event.

Yes, folks, you are witnessing the dawning of Depression II.

Look around at all of the products and businesses that have been hit by flying shrapnel from the mortgage-backed derivative bomb:

banks - like real banks

investment banks

home builders

ratings agencies

insurance companies

securities brokers

real estate brokers

commercial real estate

construction

commodities (for building supplies)

municipal property taxes

individual home mortgages

autos

student loans

every US citizen (bailout induced inflation as a form of efficient taxation)

and then there are the fringes that may not have felt the full impact yet, but the shock wave will hit them soon enough:

tax supported municipal programs and even services such as police and fire protection

credit cards

homeowners associations

medium and high-end retail outlets

basically any product or service deemed a luxury or elective are likely to experience a reduction in sales. For some the losses will be too much and will simply go out of business.

Cities and counties that rely upon property taxes will have to resort to other schemes to raise revenue - they will cut non-essential programs very late into the cycle - so for example, look for increases in traffic citations as an alternate form of taxation.

2nd Quarter Bank Losses: From information I gleaned from BankRate.com the following suffered extreme losses in their total bank asset value (this is the gross change in total assets from 31 March 2008 to 30 June 2008):

Citibank -68.3B (SD & NV branches)

B of A -32.7B (including Countrywide losses)

JPMorgan -29.1B

HSBC -10.8B

WaMu -10.8B (** Siezed by FDIC 9/25/2008)

St Street -8.6B

Merrill (Bank) -5.0B (** Merged with Bank of America 9/7/08)

SunTrust -3.2B

Combining the 6 quarters between 31 December 2006 and 30 June 2008:

Wachovia Mortgage -69.5B (** Merged with Citigroup 9/28/2008)

WaMu Bank -38.3B (** Siezed by FDIC 9/25/2008)

LaSalle Bank -12.1B (MI)

SunTrust -11.1B

Sovereign -10.3B (PA)

Chase Bank -9.5B (DE)

Merrill Bank -9.2B (** Merged with Bank of America 9/7/08)

Lehman Bros Bank -8.3B (** Declared bankruptcy 9/7/2008)

Since the end of 2006, 20 banks have lost $1B or more (combined loss -127B).

Since the end of 2007, 21 banks have lost $1B or more (combined loss -202B).

Please keep in mind that these asset values are provided by the banks to the FDIC and other reporting agencies. If their books hold difficult to value Level III derivatives then their assets reflect their own model estimates, not necessarily a real-world market value.

FDIC Bank Closures: Another FDIC bank siezure took place Friday 19 September 2008 with Ameribank, based in Northfork, WV. It was listed as one of my medium-sized banks in last weeks list of banks most likely to fail. I updated the chart to mark that banks date of siezure.

Update on Trump Towers and Solis Resort Spa: These are the two high-rise condo properties in south Florida that I had reported on earlier. The Solis construction has been largely shut down since I last reported on them. There was one week with a full crew, but that was short-lived. Recently there have been 6-8 crew looking busy but with no visible improvement. Basically I noticed 2 supervisors, 1 or 2 crane operators, and 4-5 workers. On a project of this size, these few workers are not going to accomplish very much. What it looks like they may be doing is simply securing the unused construction inventory by moving it from ground to upper floors to twart thieves.

Trump Towers is in a bind. This is a 3 tower project, each of which contain 271 units. Before construction began, all 3 towers were completely sold out. The first tower has been available for occupancy since January, 2008. The 2nd building should already be completed but there are no tax records yet. The 3rd building is still under construction but final paint and polish is occurring right now -- I am guessing occupancy as early as January, 2009. The first tower now has sales records for 103 units ranging from $525,000 to $2,100,000 each. But the sicky widget is there are at least 60 buyers suing the developers for misrepresentation. Apparently Donald Trump only lent his name for the project to initially help get the units sold, but the project may not always carry the "Trump" name. The buyers contend they were duped into paying a 36% premium over comparable units elsewhere because they were told, and the prospectus showed, that it would be a Trump property. It was only after they received sales contracts that they discovered the Trump name missing. Mr. Trump was not specifically listed in the suit.

Apparently Donald Trump is amused and said he was flattered that the buyers thought his name deserved such a premium. But there is more to this suit than just the possibility of a name change. Alledgedly, the developers manipulated secondary sales prices from Tower I with over-inflated prices so that buyers in Towers II and III were compelled into paying higher prices for their units.

Although it appears that the Trump Towers project is likely to be completed, I am sure that it was troublesome that one of their commercial loan providers, Lehman, is now bankrupt.

I know from various records that Lehman played a big part in providing partnered loans for nearly all of the high-rise condominums in this area, but I have not yet been able to determine if Lehman's bankruptcy was a factor in the Solis project getting all but shut down.

VultureCondos reports that bulk purchase real estate vulture funds are circling S. Florida, Las Vegas, and S. California markets believing that after last weeks Wall Street near-meltdown and subsequent Fed bailout, that now is the bottom and it is time to swoop in and start buying depressed condos. Apparently their current target is buying properties that are 40% to 50% of 2006 market highs. I have been searching around various real estate websites related to the S. Florida market, and I do not get a sense that there has been any panic yet, no broad based liquidation effort, and individual owners are still lowering their asking prices only a teaspoon at a time. If the vulture funds think now is the time to swoop in, I bid them good luck. Maybe there are a few developers that got caught with high-priced inventory during a broad downturn coupled with losing financing from former providers such as Lehman, but overall I think the real estate markets have a long way to fall yet. The best time to buy is when there is real panic, but it is not here yet, not even close.

Lehman Troubles: As you are probably already aware, Lehman Brothers is in deep doo-doo and this weekend is the equivalent of the weekend when Bear Stearns was sold off to JPMorgan for pennies along with a Federal Reserve backstop on the debt. The Fed appears to be playing tough trying to force Barclay's and Bank of America to duke it out over the spoils. Is there are possible 3rd party? I am not so sure -- although JPMorgan and Goldman Sachs are in position to eventually take over the entire financial and banking system, Lehman's risk is too great. Besides, Lehman is more of a competitor than a comrade. At least for Barclay's and Bank of America the better parts of Lehman could enhance their existing business model. After already taking on Countrywide Financial, B of A is in no position to burdon their own suvival by taking on Lehman's balance sheet without an exerciseable put option.

The moral hazard is alive and well.

Even for these vultures, none of the parties seem interested in taking on the massive risk exposures without some kind of Bear Stearns-like backstop by the Fed. Does a vulture really know the difference between a dead carcass from natural causes vs one caused by toxic poisoning? I dunno, maybe it's the putrid odor wafting out of Lehman's decaying balance sheet.

Push comes to shove, the Fed is not likely to simply allow Lehman to crater in an implosive bankruptcy. I believe the Fed will further indebten US taxpayers and engineer a hefty bailout once again. While Barclay's and Bank of America have been getting the media exposure over this drama, I would not be surprised if JPMorgan ends up getting a hefty chunk of prime Lehman flesh, and using their built-in clout with the Federal Reserve to backstop for a near- riskless opportunity for JPMorgan. Once again, US Taxpayers will be stuck with all the ugly parts.

Bank Ratings: The following tables show the banks and credit unions that I think are the most likely to fail over the course of the next several quarters.
As economic conditions worsen, particularly with falling real estate values, these institutions appear to be the most vulnerable.
The raw data was obtained from the BankRate.com website which provides safety ranking (CAEL: capital adequacy, asset quality, profitability and liquidity) and financial health performance ratios on over 8200 US banks and 4600 credit unions. The banks listed are all FDIC insured (the credit unions are not insured with FDIC).

I downloaded the entire database. The data is current as of 2nd Quarter, 2008.

You will note that the top of the large banks is Integrity Bank, which was siezed by FDIC two weeks ago. I had done some preliminary analysis and had Integrity pegged before the FDIC announcement, but unfortunately I did not have enough time to polish it up for posting here on CyclePro. I had posted an earlier report to Bear Forum using 1st Quarter, 2008 data, so the list below uses more current data.

The rank is a score by how many different performance ratios each bank scored as a top 20 worst performer out of the 19 different ratios (listed below). For example, Integrity Bank was a top 20 worst performer for 12 of the 19 performance ratios. The list is further refined to weigh in if the bank was also on a similar lists for 1st quarter, 2008 and for year 2007. My logic is that a bank that has been having severe financial problems for a long period of time is more likely to be siezed by FDIC than a bank that just recently started to show up on my worst performer list. That said, there were several banks (IndyMac as a good example) that were siezed by FDIC (or Implode-O-Meter) which were not ranked 5 or even 4... IndyMac was rated a 3 (ie: 1=best... 5=worst).

There were quite a few rating changes from 1st quarter to 2nd quarter. For example: H & R Block Bank, Kansas City, MO had the biggest change, from a 1 (best rating) to a 5 (worst rating). The following 6 banks changed from 2 to 5:
The Union Bank, Marksville, LA
Providence Bank, Alpharetta, GA
First Frontier, Lynbrook, NY
First Natl Bank Of Lacon, Lacon, IL
First Natl Bank Of Wayne, Wayne, NE
First Natl Bank Of Platteville, Platteville, WI

There were 91 banks with rating changes from 3 to 5. Overall there were 1556 banks with lower ratings for Q2 vs Q1.

But things were not all bad, in fact 1 bank went from a rating of 5 to a 1, 4 banks moved up from 5 to 2. Overall there were 2096 rating upgrades -- some good news for a change.

(Monday August 18, 2008 AM): There has been some discussion lately about the apparent shortage of available retail physical silver bullion products. It seems as though investors are having a difficult time obtaining bullion coins or bars. Personally, I have not noticed a problem since my most recent purchase was last Spring and recent phone conversations with my usual suppliers did not suggest a tighening of inventory. However, it is what it is.

In the event that newly fabricated bullion products are in such short supply that investors may be willing to take some risks to get them, I wanted to post the following photo I took in 2003 of a bogus silver bar from the 1980 silver bull market. This photo shows that someone took an authentic 100oz bar and bored out 3 columns filling them with lead. On the outside the bar looked completely normal and testing by weight did not reveal the hidden deception. The precious metals dealer that provided this sample told me that the only way to know was to either have a very keen ear to listen to the "thunk" sound when held up and rapped like a bell, and the other way was to physically cut or drill into it.

I am not aware of any problems in any of the available bullion products. I was told that all known bogus bars fabricated during the 1980's, like this one, were removed from circulation. However, that does not mean that theives with not try it again, particularly as the price of silver rises enough to make it worth their while. I believe that all recently fabricated silver bullion products coming directly from reputable sources should be clean and reliable.

Please be cautious when dealing with unknown dealers or blackmarket opportunists.

(Sunday August 17, 2008 PM):
Last weekend I was browsing through the information at BankRate.com and came across data they maintain that assesses the Safety Rating of each of the 8260 banks and 4600 Credit Unions in the U.S. The ratings are 1-5 with 1 being the highest or strongest banks and 5 being the worst or most vulnerable to faulure, at least that is my description of them. So I decided to download the entire database of data. The following tables summarize the banks by state, for the 4 categories showing the highest percentage rated 4 or 5 (bad states), lowest percentage rated 4 or 5 (good states), highest percentage rated 1 or 2 (good states), and lowest percentage rated 1 or 2 (bad states).

Puerto Rico has been included in the data and is significant in that it is consistently one of the worst "states". This one surprised me since I had not heard anything about banking safety quality in Puerto Rico. Georgia was another that surprised me.

The following summaries contain data only for US Banks (I did not include Credit Unions at this time).

States with the Highest Percentage of Safety Ratings 4 or 5 (Bad)

Rank

State

#Banks

Rated 4 or 5

Most Low Safety Rating

1

Puerto Rico

21

12

57.1%

2

Georgia

431

133

30.9%

3

Florida

393

120

30.5%

4

Nevada

61

18

29.5%

5

Michigan

350

87

24.9%

6

Arizona

83

18

21.7%

7

Minnesota

532

110

20.7%

8

California

588

109

18.5%

States with the Lowest Percentage of Safety Ratings 4 or 5 (Good)

Rank

State

#Banks

Rated 4 or 5

Least Low Safety Rating

1

New Hampshire

38

2

5.3%

2

Mississippi

147

11

7.5%

3

Texas

930

76

8.2%

4

Oklahoma

303

26

8.6%

5

Montana

116

10

8.6%

6

West Virginia

139

12

8.6%

7

Kansas

409

39

9.5%

8

North Dakota

115

11

9.6%

9

Louisiana

295

29

9.8%

10

Kentucky

254

25

9.8%

States with the Highest Percentage of Safety Ratings 1 or 2 (Good)

Rank

State

#Banks

Rated 1 or 2

Most High Safety Rating

1

Oklahoma

303

222

73.3%

2

Texas

930

653

70.2%

3

New Mexico

77

53

68.8%

4

Kansas

409

276

67.5%

5

Mississippi

147

99

67.3%

6

Louisiana

295

198

67.1%

7

Nebraska

284

190

66.9%

8

Montana

116

77

66.4%

9

Iowa

467

305

65.3%

10

Arkansas

177

113

63.8%

States with the Lowest Percentage of Safety Ratings 1 or 2 (Bad)

Rank

State

#Banks

Rated 1 or 2

Least High Safety Rating

1

Puerto Rico

21

4

19.0%

2

Rhode Island

29

10

34.5%

3

Arizona

83

29

34.9%

4

Florida

393

145

36.9%

5

Vermont

32

12

37.5%

6

Idaho

56

21

37.5%

7

Georgia

431

166

38.5%

8

Michigan

350

135

38.6%

9

Maryland

159

66

41.5%

10

Nevada

61

26

42.6%

(Sunday August 17, 2008):

The following is an updated chart of the U.S. Residential Mortgage Debt Outstanding. Along with it, I overlayed the Average Mortgage Debt per Financed Household. The average debt and the total debt follow an almost perfect correlation. Along with existing homes, included in the average debt is all of the new homes constructed for which the buyers used mortgage financing. The data is updated as of Q1'08 which is the most recent I could find available. The household counts are from US Census data.

Click chart to enlarge.

If home market prices have fallen to the 2003 level, then it means the total mortgage debt outstanding is underwater to the tune of $4.3 Trillion. The average mortgage debt is at least $100,000 underwater, per hoursehold!

In 2003 there were 105.3 million households and now about 110.7 million. Therefore, a net of 5.4 million new homes have been added to the inventory. The number of households with mortgage financing in 2003 was 33.9 million and now it is 35.5 million -- this is weird, quite contrary to what I would have guessed. Since so many people who otherwise had homes completely paid for then took out HELOC loans, I really would have expected the number of financed homes to increase much more then the number of new homes.

The Case-Shiller Housing Index is showing a very clear selloff in home prices. The chart below shows the 20-City, 10-City, and Miami indexes which reveal -17.8%, -19.1%, and -28.6% average price declines, respectively.

Click chart to enlarge.

Miami is an interesting housing market. Throughout recent history (at least since 1987 for which Case-Shiller data is available) the variation in average home prices has stayed very close to the US average... well, until August-September, 2004. The following charts shows the Miami-US spread, ie: the average home price for Miami minus the average home price in US. From 1987 through 2004 Miami prices varied from US averages by about $10,000. Then in August-September is when the correlation broke down and Miami prices soared -- the variance went from $0 to $59,000 in 2.5 years. Of course there were interest rate incentives, but that also affected the entire US, not only Miami. What set Miami apart from the rest of the US was one thing, fraud. Fraud in the form of unrestrained speculative property flipping, no-doc and liar loans, realtors front running buyers to inflate prices, panic buying to own the last of ocean-front views. Heck, even if you had to stand on your toes and stretch your neck out around the corner of the building to see a tiny glimps of water was considered "ocean view" property. The frenzy was so frothy that a buyer had to be prepared to plunk down a deposit on the spot or risk losing the deal an hour later to another "professional property flipper". Every 3rd person on the street was a "realtor".

The California market was not much different. Home prices were already out of reach for most buyers. For many hopeful buyers, no-interest loans were the only means to home ownership. I wrote on CyclePro back then how no-interest was only slightly different than renting, the buyer gets to profit if prices rise, but they can walk away without losing equity if prices fall. The only reason banks went along with the scheme was because they collected fat fees and then bundled the mortgages up and sold them to unsuspecting investors. You have already been reading about the whole MBS (mortgage-backed securities) crisis and the CDO (collateralized debt obligation) crisis that tagged along, so I will not go into any more detail here.

While the entire US experienced rampant mortgage abuse, it was California and S. Florida that allowed systemic fraud to escalate the housing market into an ponzi orgy of unimaginable magnitude. These were industrial-strength bubbles.

It is precisely the reason that California and S. Florida experienced such wreckless froth that their consequent reversion must be similarly severe on the downside. Overall, housing prices tend to rise along with income levels. When home prices get too far out of line with incomes, something has to give to get back into equilibrium. If incomes cannot rise, then home prices must decline. Certainly there are geographic pockets that attract a more affluent population, but even their incomes still drive the affordability of home prices in that area. The rule of thumb has always been and will continue to always be: families can afford a home costing no more than 3x of their household income.

Is it no wonder why so many families have to maintain multiple jobs in order to keep up with their mortgages?

Click chart to enlarge.

If it was only home buyers that were affected it would be a bad situation. But unfortunately things tend to get intertwined with other aspects. For homeowners in areas that experienced these massive housing price increases, they were either pushed out by rising property taxes and insurance rates, or they used their Cinderella equity to cash out and spend as though they were living in that perpetual fantasyland. The bubble has burst. Housing prices are coming down. The Cinderella home equity ATM machine is out of order. And the carriages are turning back into pumpkins. Homeowners that withdrew home equity cash are now faced with property with values less than their new outstanding debt balance. It is not just new home buyers, it is also those that had previously owned their homes yet withdrew so much equity that they are now at underwater-par with the new buyers. Habits are difficult to break, and after many years of home equity ATM spending, homeowners have turned to their credit cards to continue their fantasy lifestyles. Foreclosures are rising, setting records not seen since the 1930's. Defaults on everything related to debt are rising: homes, cars, credit cards, student loans, you name it, if there is debt involved defaults are increasing. No debt is immune at this point.

This is what has already happened. Now we get to talk about was is likely to happen in the coming months and years.

Because so many people have been caught up in this tangled debt web, it will have a huge impact on the overall economy. Spending will have to be curtailed in order to address this debt, the defaults, and the cleanup. To make matters much worse, US Congress passed the housing bill that now allows the US government to baskstop Fannie Mae and Freddie Mac losses -- all of which will have to be paid by tax dollars. Now it is no longer a problem of only those that participated in the speculative housing, freewheeling home equity spending, and all of the fraudsters that helped make it all happen. Now, the 75% or so of prudent Americans -- that did not get involved, that resisted raping their home equity, that saved earnings, that kept their debt balance at manageable levels -- are now being forced to donate to the housing bailout. Taxes will rise. I certainly expect traditinal taxes to rise, but it is the stealth taxes that will be the most pervasive. By stealth tax, I mean inflation -- in his Congressional testimony last month, Ben Bernanke admitted to Ron Paul's questioning that inflation is, in fact, a tax. No one can escape the tax of inflation because all commerce conducted in US Dollars will be automatically adjusted to withhold the tax. What I mean by this is as tangibles and commodity prices rise, everyone will either be forced to pay the higher price or switch to an alternate commodity. As more begin using the alternate it puts pressure on its price so it rises too, then another alternate is sought. Pretty soon, no alternatives are left and unless demand reduces, prices will continue rising. It is this incremental price increase that has the exact same effect as if a tax were imposed on the original base price of that commodity.

Because it is all built in to the price, it is therefore a "stealth" tax. This is the most efficient form of taxation to which no one can escape if you wish to exchange in commerce using US Dollars. This is precisely why George W. Bush has never raised formal taxes, because spending Dollars the US government did not have and the Federal Reserve accomodating by create whatever necessary. There was no need to raise formal taxes and have the populace protest. Instead, Bush was able to spend, spend, spend, and tell Americans to likewise spend, spend, spend. Meanwhile and unbeknownst to most Americans, they were being treated like the frog in the pot, gently being warmed ever so slowly. Unfortunately, the fire has gotten hot and prices are rising so fast that everyone is now noticing, and screaming for relief. The tax that is infation is being paid, whether you like it or not. If you don't like it, move somewhere that does not have an inflatable fiat currency -- look around, nope, I cannot find one either.

But the stock market is holding up well despite the myriad of financing crisis. Or is it? While the DJIA is down far enough to be considered in a bear market, it is still much higher than it should be (in my opinion of course). The following chart uses the inflation data from Shadow Stats to recalculate the DJIA when adjusted for inflation (using year 2000 as the base). Please notice that January, 2000 was the all-time inflation-adjusted peak and the "value" of the index has been falling ever since.

Click chart to enlarge.

This chart clearly notes the 35 year inflation-adjusted stock market cycle (17.6 years down + 17.6 years up). It is not as visible on a standard stock chart, but when inflation is taken into account the cycle emerges. Adding 17.6 years to the DJIA peak in 2000 provides an estimate for the next low, Summer 2017.

Another illustrative thing about this chart is the effect inflation actually has on stock prices. I am sure that the vast majority of stock investors believe that as long as stock prices rise they are profiting. Just because the price level quote in the paper, or on the ticker across the bottom of your TV screen, shows a higher price does not mean that the "value" of the dollars used to buy those shares are necessarily worth what the higher price suggests. It's a mirage. Inflation is a tax which systematically and very efficiantly eats away at those profits. The chart makes it clear, that the current DJIA is no better off now than when Alan Greenspan gave his famous "Irrational Exuberance" speech in 1996. And, at the time Greenspan though stock prices were overvalued!

By the way, just to clarify the curved lines on this chart. This chart is displayed as linear while the curved lines are logarithmic. I cannot display it both ways at once. Logarithmic lines are useful to denote changes in percentage rather than absolute linear value. This makes it possible to compare previous portions on the DJIA history with the current data. For example, the blue line represents extreme bull market peak levels tounched in 1929, 1966, and 2000 while the green lower line represents bear market bottoms, such as those in 1932, 1982, and what I expect to be in 2017. The 1948 low was not low enough to touch the green line, but it was a signficant low nonetheless. The future DJIA may very well show a printed price level above or near where it is today, it does not matter really, because after adjusting for inflation, the 2017 level should be much closer to 4000 (which coincidently, is roughly where the 1966 peak ended).

My previous forecast for Gold has been rather sobbering after being slapped hard by the market. The following first chart should help explain what has happened. I labeled "I" where I had originally forecast to and up to that point everything was working as planned. We got a weak rally off of that low for 3 days. Unfortunately, prices turned down again and a point "II" we had what appeared to be 5 waves down -- this is bad news for bulls because it means it is likely to be wave 1 of a 5 wave structure down before it completes.

I cautiously reduced 50% my call options with a bit of a loss. We are currently at point "III". The next chart shows the intra-day detail of GLD. On Friday (8/15/08) I put half of what I sold (from point II) into more call options and plan to use the remain portion to buy more calls very early Monday morning (8/17/08). The reason is the following chart:

Here I have labelled what I believe is the terminal few waves of the whole sell-off. How far down the red 5 goes I have no idea, but I think it will be sharp and very brief. The reason behind this expected move is based almost entirely upon the likelihood of spillover of broker selling to meet margin calls. Those market sell orders have probably already been placed so they should be filled during the opening sequence. I have already placed my orders to buy my remaining call options with the hopeful expectation of getting filled during this sharp down-draft. GLD closed at 77.63 -- at times like this you have to pre-calculate what you believe the option prices will be well in advance of the price move -- will Monday's sell-off drop to 76, 75, 74, or lower? Or will it rally instead? The final 5th wave of a 5th wave are notoriously difficult to guage accuarately. This is why I started buying Friday, just in case Monday unexpectedly rallies right out of the chute, or in case my pre-market buy orders do not get completely filled.

Notice on Friday's chart that the volume was unusually high while the price drop was rather contained. The range for the day was only slightly more than 1 point. This tells me that there was an unusual number of buyers offering price support and that for the rest of the day the bull/bear fight was rather subdued (as demonstrated by progressively lower volume coupled with progressively lower volatility).

One more reason for my bullishiness following the recent gold selloff is the following chart: a long term ratio of gold price divided by HUI index. I noted where each of the ratio peaks occured corresponded with very nice lows in the price of gold. HUI is the index of unhedged gold stocks. The ratio shows the ebb and flow of investor preference for stocks vs physical metal. When the ratio is high it means you can buy more HUI with each ounce of gold -- meaning investors prefer physical gold and shun gold stocks. When the ratio is low it means investors prefer gold stocks as one ounce of gold buys fewer shares of HUI.

Clicking on the chart shows the recent daily detail. Statistically speaking, last weeks selloff of gold stocks was an very rare outlayer. I think it is significant. I am aware that just because the ratio hit an extreme level does not necessarily mean the market must turn, but I guage my investments by these anomolies along with Elliott Wave, such that if the wave structure breaks down unexpectedly, I have my signal to get out early and stay out until forecastable indicators improve.

Click chart to enlarge.

The next topic I want to discuss is deflation vs inflation. As I have stated previously we are in the midst of a Kondrateiff Winter (see more discussion below). Traditionally, winter is characterized as a severe deflationary season of the full Kondrateiff long wave. I said in a previous posting that the stagflationary feel of the economy was not Winter-like, that something has to give. If you guage commodity inflation by the CRB index, then it appears that the inflationary side of the argument may be waning since the CRB is down almost 20% from the July, 2008 peak. I think over the next 2-3 months we could see a left shoulder formation in the large head-n-shoulder pattern. If Kondrateiff Winter is to take hold, then the CRB should not make new highs any time soon.

Now Ben Bernanke has made it quite clear that he has no intention of allowing the US economy to fall into a deflationary recession and certainly not a depression (apparently he carries a printing press in his back pocket to create Dollars as necessary and a helicopter on stand-by to distribute them). Please make sure you understand that Ben Bernake is a banker, he works for the banking organization called the Federal Reserve, which is a corporation of which all shareholders are banks. His primary responsibility is to his banker buddies. Any other benefit derived from Federal Reserve machinations is totally superficial and merely coincident with the intended effect of supporting the banking system. To think that the Federal Reserve changes policy to help average Americans financial goals demonstrates a severe misunderstanding. The Federal Reserve will only come to the rescue of us little guys once they are satisfied the banking system is functionally stable. Right now we are in a massive crisis situation and all Federal Reserve focus is squarely on its member banks. Even independent banks are being left out.

The Fannie/Freddie bailout is illustrative. Morgan Stanley (MS) is functionally insolvent. The Federal Reserve and US Treasury recognize that an MS failure is too similar in magnitude to Bear Stearns. All they need right now is another big-name Wall Street firm going bankrupt. The inter-connective dealing between MS and other Wall Street firms is so intertwined that failure is not an option at this time. So what does the Federal Reserve do? They take MS under their wing and give them a little job to do. MS is supposed to help oversee the finances of the Fannie/Freddie bailout... all without looking at their books. It is kind of like the mobster movies, if MS knew the details they'd have to be killed. So MS is being allowed to limp along as a gopher (go-for this, go-for that) for Bernanke and Paulson... just a little something to keep MS busy and out of trouble.

This all begs the question about what to make of the government and Federal Reserve bailouts. All I can say, is what we are witnessing is hugely inflationary, particularly if the economy tanks further and additional bailouts continue. That said... the inflationary impact of these machinations are not necessarily going to be felt today or tomorrow. The effects are more likely to be felt several years from now. It simply takes a very long time for everything to work its way through the system. Ultimately, we should see dramatic inflation -- I expect double digits. Whether it turns into hyperinflation depends upon Ben Bernanke and Hank Paulson and the extent of future bailouts.

So for right now, I think were are seeing the early stages of a blizzard brewing.

(Friday July 25, 2008 AM):

S. Florida Real Estate Update: As a CyclePro news scoop: Just south of the Trump Towers project is the construction site for the luxury Solis highrise condos. The developers have run out of money and construction has ceased. The only activity at the site this week is the presence of a lone security officer. The cranes are idle, no wet cement flowing to the upper floors, the entire building carcass is fully exposed to the elements of nature. This is not a good time for a large project like this to cease construction midway -- we are early in the hurricane season. The Solis condos were supposed to sell for $900,000 and up. The Solis was the south-most property that would have unobstructed eastern and southeastern ocean views. The parking garage floors are higher than the Tropicana condo just to its south, so that all Solis units are well above the Tropicana roof. Construction was stopped at the topmost parking floor, the first residence floor was just about to be started.

Right between the Solis and Trump Towers is the Ocean Palm Motel. It was sold last year to developers of Chi Miami who also had made plans to build an ultra-luxury highrise condo. Chi was to include Bentley shuttle service. Fortunately for them, they chose to suspend the project before demolishing Ocean Palm an starting their own construction. The Chi condos are only one unit per floor, which means 6000 square feet (4700 inside plus 1300 oceanside terrace) and each unit terrace includes its own private pool. Prices were to start at $5.2M per unit.

If the Solis developers do not find new funding soon to continue construction, the current building will be an unsightly blemish for the Sunny Isles Beach skyline. The developers will have to hope that the building does not get overgrown with mold, because if sufficiently severe, the entire project may have to be dismantled before any renewed construction can begin.

Of the 9 highrise condos currently under construction in the Sunny Isles Beach area, the Solis is the first to run out of money and halt construction. At CyclePro, I had previously predicted that at least 1/3 to 1/2 of these projects would go belly up before they finished and Solis is helping to see that prediction though.

(Saturday July 12, 2008 PM): Gold Update:

The following chart shows a technique which I use that has a fairly high success rate. The trendline off of the resistance tops of the previous 2 peaks is the same trendline that became support holding this weeks lows. The 5 waves up (so far) from June'08 lows suggests the move is impulsive while all of the downward activity since Mar'08 highs appears to be mostly corrective. Take a step back and look at a 1-2 year chart and the picture becomes more clear.

Click chart to enlarge.

I think the next significant bull wave in gold has just started and this chart breakout is a high probability confirmation.

As I see it right now, there are 3 separate Elliot Wave scenarios beginning from the Jun'08 lows.

If the recent 5 waves is really a count of 1-2-3-4 and now 5 (Scenario I) it suggests topping near 96 and a near term pullback to 900 area over the next week or two. Following that a very strong rally should commence that decisively takes out previous Mar'08 highs. Of the 3 scenarios, this is the most bullish. This also happens to be my preferred EW count.

However, if the waves up are 1-2, 1-2 and now 3 then it suggests we could rally up to near Mar'08 highs before a pullback lasting perhaps 2-4 weeks before resuming higher later. This is my secondary EW count.

The 3rd scenario is a valid EW count structure, however, I believe it is a low probability. This is a more bullish pattern than Scenario II but less than I. The thing to watch here is whether the existing rally can continue with significant strength. For example, a strong move well above 96 before a pullback of more than 1 day might raise the likelihood of scenario III while weakening Scenario I. The main difference between Scenario I & III is the timing and the price targets.

This sort of thing happens quite often but the ramifications are not always as big as this. I know as fact that Enron routinely provided the write-up for Congressional bills related to US energy policy, energy trading, and derivative trading. Look where that got us (and Enron)!

I know this a quite a rant, but in my opinion this one is big, real big.

Make no mistake this is a bomb, a financial bomb, and every bit as potent as any nuclear device that could physically decimate an entire city or state. This bill is a cleverly veiled attack on the financial sovereignty of the United States. As such, it should be considered a treasonable act.

Apparently Bank of America/Countrywide Financial may not only have provided the write-up for the homeowner mortgage bailout bill, but some of the Congresspersons & Senators responsible for the bills introduction may have received illegal payoffs in the form of extra-special personal mortgage terms via Countrywide. Not necessarily in that order... the story of Dodd, et al getting V.I.P. mortgage terms has been out for quite some time already.

However, now we find out within the text of this bill that BAC may have written what amounts to a PUT option with a strike price of $300 billion. If this PUT goes in-the-money, we as taxpayers get stuck paying for it.

And, if Denninger & National Review Online are correct about the bills intentionally crafted loopholes that allow other banks to write their own equivalent of PUT options means the in-the-money exposure to US taxpayers may be virtually unlimited... not $Millions, not $Billions, but $Trillions!

After reading Denninger's article and the other article links, think it over for a few hours to really let it sink in how expansive this bill could get, then pick up the phone, fax, and/or email your Congressional representatives and voice your opinion of this incredibly potent financial timebomb.

You can bet that if BAC is successful with this, the top execs will receive substantial bonuses for instrumentally helping to save BAC from ($300 Billion) insolvency. I'll be damned if I am going to sit back and let my hard-earned tax dollars go straight into their pockets.

The truth is starting to come out. Bank Of America was less interested in buying Countrywide's business than they were to buy the political influence behind Countrywide's VIP loans to key Congresspersons & Senators. BAC's $4 Billion stock buyout of Countrywide was a drop in the bucket compared to BAC's potential for $300 Billion portfolio loss.

Kill this bill!

And while you are at it phone, fax, and/or email each of the members of the Congressional & Senate Ethics Committees and tell them what you think about Dodd, et al receiving personal bribes (via special Countrywide mortgage terms) to promote this bill that may have actually been written by the persons making the bribe!

While all of this campaign to alert our Congresspersons is necessary to keep us taxpayers from being exposed to incredible losses, this is really just the first step... the ultimate goal needs to be that all persons participating in this slight of hand maneuver be charged with felonies for bribing our public officials. As for the key Congresspersons & Senators, censure & impeachment are inadequate, with the very magnitude of the financial disaster this may cause, treason is the only acceptable charge.

(Sunday June 1, 2008 AM):

The body of evidence is clearly tagging the current economic climate as "Stagflation", at least for the time being. We are in the midst of a deflationary Kondratieff Winter (see more discussion below) at the same time as significant monetary inflation pressures, predominantly from crude oil and commodity prices. Normally, stagflation is a Kondratieff Summer phenonmenon. If this is to play out as a true Winter, then I would expect the inflationary portion of the economy to taper off so the deflation/depression aspect to take full control. To be honest I have no idea which way things will go, but either way I believe gold & silver will be the least risky investment. The Gold/Silver and DJIA/Gold ratio charts continue to track my long-term outlook and are unlikely to be affected by the struggle between inflation/deflation.

I have been harping for many years about how Crude Oil is essentially a world currency in much the same way as gold is -- both are accepted without reservation anywhere in the world at spot market value. However, Crude Oil is quickly consumed where almost all of the gold ever mined in the history of man still exists. In some form, every item on the grocery store shelf requires energy to manufacture and energy to transport it. Crude Oil is the raw source for all of this energy. As the price of Crude Oil rises, all alternate sources of energy competatively rises in price: coal, nuclear, natural gas, etc.

In my part of the country diesel pump prices are now just under $5/gal and regular gasoline is hovering just above $4. To help find lower priced gasoline at stations in your area, try this link and specify your zip code. Please note that this is not a comprehensive list of gas stations, only those that report their prices to OPIS. But it does provide a good general assessment of the range of pump prices available in your area.

The following chart shows the market value of Crude Oil imports into the US from 1999 - 2008 (OPEC plus non-OPEC imports). The 2008 estimate may appear to be wacked out as an outlier, but the numbers don't lie. We are on target to pay as much in 2008 as 2005 & 2006 combined... or another angle, as much as as the 5 years 1999-2003 combined. The 2nd chart shows the details for 2008 actual and estimated values.

Just the move from 2007 to 2008, the incremental price rise of Crude Oil along with unchanging US demand and a falling US Dollar, means we are all collectively paying $166B more for oil this year than what we paid last year. That is $166B of discretionary income redirected to only energy demand. That's about $550 per US resident. At least those elegible for the Bush Economic Stimulus will be able to offset some of their increased energy costs this year. Whatever stimulus Bush was hoping to achieve was sideswiped and ended up being an energy cost rebate rather than economic stimulus. Too bad US taxpayers were the ones paying for the rebate. The stimulus checks have therefore become more of a welfare check, and alas, no benefitial stimulus effect to the economy. Chock up another failure for the Bush adminstration.

The US Department of Energy estimates that each American uses 500 gallons of gasoline per year. At todays prices, that's about $2000/yr per person. Overall the US consumes 146B gallons of gasoline per year which is currently valued at $584B.

If the median lifetime of an American car is 17 years and the average car uses 750 gallons of gasoline per year then at $4/gal a total of $51,000 is spent for fuel on each car. Regardless of how efficient a car is, it takes the energy equivalent of about 2340 gallons of gasoline to produce each new car.

Locally filtered bottled water is usually vended at $1/liter which is roughly what gasoline costs at the pump. One barrel of filtered water would cost about $159, Evian would be over $300/bbl.

The US Strategic Petroleum Reserve (SPR) is currently 99% full and holds up to 570M bbl of oil. If imports were cut off, this amounts to no more than a 60 day supply. The SPR is currently valued at $72.4B.

In the Corn-Ethanol debate, year 2006 statistics show that 1.8B bushels of corn were grown to produce 4.9B gallons of ethanol. Since it takes 1/2 gallon of gasoline to produce 1 bushel of corn, then that means the US consumes 900M gallons of gasoline/year to grow the corn used to make ethanol. Approximatly 21.5 gallons of gas can be refined from 1 barrel of crude oil. 900M gallons represents approximately 42M bbl oil, and that only represents about 1% of all US oil imports.

Greenspans Evil Alchemy

In the past I periodically ripped Alan Greenspan for using the US economy as his laboratory for his financial alchemy experiments. Up until 1996 his record was not too bad, almost commendable. In December, 1996 he gave his famous "Irrational Exuberance" speech in which he recognized the stock market was overheating. However, almost immediately he changed his view and began a series of meddling that blew the stock market way beyond all sense and reasoning. In his acedemia days he routinely theorized that economic cycles could be minimized through specific interventions. He got his chance to exercise his theories -- the 2000 Nasdaq bubble, 2006 real estate bubble, and ongoing debt bubbles are all a direct result of his machinations. Ben Bernanke has taken over and continues to toy with the US economy with even more exotic financial alchemy experiments. Not only are we are all the guinea pigs, but we are also required to pay for these experiments whether they succeed or fail.

The Fed assisted bailout of Bear Stearns was actually a shell game while Wall Street and America watched the Fed's slight of hand maneuver. The bailout was not really intended to bail out Bear Stearns, they were simply the scape goat. The real reason the Fed stepped in to provide backing on the deal and expand the discount window with TAF, TSLF, and PDCF facilities for bank & non-banks to access Fed funds, was to bail out JPMorgan-Chase. James Dimon is not only the CEO of JPM but he also sits on the Fed board. This little switcheroo was orchestrated by Dimon to give the impression Bear Stearns was the bad guy that needed to be bailed out to keep $ trillions of derivative contracts from unravelling. While Bear Stearns was essentially deemed insolvent, Dimon seized the opportunity to direct the attention toward Bear while ensuring that JPM could have access to all of the Fed cash it needed. The average Joe got the impression that JPM was the pillar of strength, swooping in to rescue a wounded comrade, taking it under its wing to keep Bear from failing. The initial buyout of $2/share was Dimon's way of declaring ultimate defeat over his rival, but then had to restate the offer to $10. This new offer had nothing to do with Dimon having a conscience of guilt, rather it was simply because the incorporation laws of Delaware (in which Bear Stearns is incorporated) require shareholder approval for any buyout exceeding 40% of outstanding stock. The new offer was $10/share for 39.5% of stock rather than $2/share for the entire company. It was a ruse that everyone fell for. Now JPM has virtually unlimited access to Fed funds. With Dimon on the boards of JPM and the Fed, this access is likely to remain permanent. Does no one see this as a conflict of interest? Or, a violation of the charter of the 1913 Federal Reserve Act?

The latest Fed balance sheet shows a total reserve of $987B of which only $199B is lendable Federal Reserve Bank notes, $567B pledged collateralized treasury & agency securities, $13B gold and SDR's, and $207B "other" assets. All of these collateralized pledges are recorded at face value. This means 80% of Fed reserves have already been assigned to various forms of lending collateral. Since the identity of the banks using this Fed ATM is being kept secret, no one except the Fed (and certainly James Dimon) knows who all of the weakest participants are.

I am afraid the legality of the opaqueness in keeping the names secret is way beyond my knowledge. It just seems to me there are Constitutional arguments here that taxpayers have the right to know how their Dollars are being used. While the Fed itself does not use tax dollars directly, because the Fed can create an infinite supply of Dollars at will and therefore create monetary inflation at will, means the Fed can stealthily tax all holders of US Dollars through this inflation. By not revealing which banks and financial centers are exchanging their collateral securities for Fed funds, the Fed is abusing its charter responsibilities to Congress and all Americans. And since we're talking about inflation as a stealth tax, then it really affects anyone worldwide that hold US Dollars, which includes all central bank reserves holding Dollars or any currency or commodity directly linked to Dollars.

Click for article.

The paper US Dollar bills are in the process of being redesigned to better protect against counterfeiters. The new $5, $10, $20, and $50 have already been placed into circulation. The $100 will be introduced soon. At some point the US Treasury will discontinue accepting the old dollar bills. This means that millions of people worldwide that have Dollars stashed away in their cookie jars will suddenly discover they are worthless. If anyone has a stack of Dollars locked away in their safedeposit box or home safe, please begin the process of swapping the old designs for the new ones so you are not caught holding worhless paper. Jeeze, it's not bad enough that the Federal Reserve is systematically stealing our purchasing power away via monetary inflation, but soon they will completely wipe off their books a $ Trillion of old Dollar bills.

Since energy is such a large part of every component that makes up the CPI, I would not be surprised if the calculations for "Core CPI" get adjusted again to remove all traces of energy from core items. For example, if the BLS concludes that perhaps 10% of the market price of wheat is the result of the energy costs to produce & transport it, then the BLS is likely to strip 10% off of the wheat component and dump it with the rest of the energy bucket. It does not change the end result of how energy affects all things we consume, but a lower core rate will allow Ben Bernanke to report lower inflation in Congressional hearings.

According to Ian's interpretation of the Long Wave, the following are the key hallmarks of the Winter season that we can look forward to:

Stocks start major bear market, the size of which is in proportion to the preceding bull market

Debt repudiation significant

Bankruptcies

Banks and quasi banks in crisis

Credit crunch – interest rates rise

International currency crises – a la 1931-34

Gold and gold equity prices rise as deflation takes hold

For those readers that are not familiar with the Long Wave, the list above was assembled long before the current financial crises started playing out.

Ian believes that the 2000 stock market peak was the start of the current Winter season. However, real estate prices did not peak until 2006 and the major US stock indexes peaked again with a higher high in 2007. Gold &amp' silver prices bottomed in 2001. So where does that leave us? If Ian's assessment is correct, then the Winter season began in 2000 and should last until 2020. If, however, the start was the 2007 stock peak, then we'd be looking at 2027 before its end. And of course there is a 3rd possibility, that an even higher high might occur sometime over the next few months or years... then what?

My own analysis suggests the most likely timeframe for the end of the stock & real estate bear market and the peak in gold & silver is as early as 2012 and as late as 2018.

When cycles repeat they tend to read from the same script, but with a lot of ad-libbing along the way. The current financial mess is supposed to be similar to the previous Long Wave winters (like the period from 1929 to 1949), yet the US is no longer on the gold standard, Helicopter Ben is in control of his little digital printing press, personal debt is at record levels and continues to mount, the massive real estate bubble popped, and the financial machinations that enabled that bubble poisoned the balance sheets of our cornerstone banks and financial centers. Even the Federal Reserve has taken on toxic and probably worthless financial securities as collateral on loans (the difference between face value and market value is unlikely to ever be paid back). We may be in the midst of a Kondratieff Winter but the sub-prime collapse was only one of a series of blizzard storms we are likely to suffer through the course of this long season.

SUV Graveyards

Several years ago I predicted that we would eventually see "SUV graveyards" once gasoline prices rose sufficiently. We have not yet seen total abandonment yet, but recent statistics suggest we may be getting closer to fullfilling that outlook. Kelly Blue Book says full-sized trucks and SUV's have lost 15-17% of their resale value in the past 1 year. This means an SUV purchased new from a dealer in 2006, after the loss of just driving it off the lot, the 2007 resale loss and now the 2008 resale loss, may now be worth only about 1/2 of that purchase price in the current resale market.
CNW Marketing Research says used sport utility vehicle sales in March were down 14% compared to last year. National Automobile Finance Association revealed that delinquencies on sub-prime auto loans are now running at 11.6%. For many buyers, this means they may very well be making car payments on a vehicle worth less than their outstanding loan balance. Auto insurance companies typically lag reassessing resale values by at least 1 year so car owners may be paying insurance on a car at a higher rate than it would be for its current market value.

Property Tax Shortages

Everywhere that home prices are losing market value, so too are the local taxing authorities losing tax revenue. The reassessment of home prices always lags behind current market values. To speed up the process, I recommend that homeowners that intend on staying in their homes for at least several more years to annually protest their tax assessment value. As homes for sale in the neighborhood sell at lower and lower prices, use them as evidence that your home must also be assessed downward. Even if you are planning to sell soon, a lower assessment may help entice thrifty buyers looking for properties with lower property taxes.

Because tax assessment values leg current market conditions cities and counties are only now beginning to feel the pinch from last years downward move in hoime prices (which was very little in most areas). Next year is when the 2008 losses will begin to show up. If home prices lose 15 -20% from 2006 peak levels, then taxing authorities will lose an equivalent in tax revenue.

To make up for the shortfall, expect one or more of the following scenarios:

Tax rate increases

Stealth tax rate increases - for example, the tax rate may not change but the portion of a properties value devoted to buildings may increase relative to the portion for land. Many property tax rates are based upon construction & dwellings while land is not otherwise taxed (unless it is an empty lot). Example: if a property is assessed a value of $250,000 such that the house is worth $200,000 and the land $50,000. If the assessment ratio is changed so that the house is worth $225,000 and the land at $25,000, the total remains unchanged, but the tax bill will subsequently increase. This kind of change can occur even without voter approval of a millage rate increase.

Local and state traffic patrol cars may start citing violations much more frequently. Most people do not consider a speeding ticket as a form of taxation. However, if the motivation behind an increase in citation activity is to raise more revenue, then it truely is a kind of tax. Unfortunately when this occurs, it is unlikely the judicial side of processing traffic citations does not increase staff so they end up being overwhelmed, bottlenecked, and inefficient. Expect much longer waiting lines.

Cutback in services - this is usually the last resort.

Trump Towers Update

The Trump Towers project in Sunny Isles Beach is now up to 65 units sold out of 271 available in Tower I. The county recorder may be a bit slow keying in the sales data. Jan-Mar'08 saw 56 sales while so far, Apr-May have had only 9 sales. This project is way behind comparable projects completed prior to 2007. By comparison, at least 1/2 of the available unit sales should have been closed within the 1st 5 months following the certification for occupancy in Dec'07. The Trump Palace project up the street closed on 140 units in its 1st 3 months in early 2006 while the La Perla project closed on 250 units in its 1st 3 month (Nov'06-Jan'07).

Since the Trump Tower project was completely sold out prior to breaking ground with constructon, what appears to be happening is that the vast majority of participants were speculators and property flippers who have since walked away giving up on their initial deposits. Unfortunately, there are 2 more towers in this project for a total of 813 units. If Tower I is having this much trouble I can only guess how bad it will be for Tower II and Tower III. In tiny Sunny Isles Beach there are 6 more highrise condo projects still under construction. I expect at least one project to be in receivership by Q1'09 (whether it is completed or not) and at least 3 of these projects in receivership by Q1'10. So far, the only buyers have been those wealthy enough to buy their units outright. Now and for the foreseeable future, mortgage financing is impossible to find in S. Florida for highrise condos. This places a severe drag on condo sales for buyers who cannot afford to buy outright. I doubt lender restictions on mortgages for highrise condos will be lifted any time within the next 3-4 years. I hate to be so negative on this outlook, but I am afraid the only way to buy a condo in S. Florida is to wait until the project goes into receivership by the banks that financed the project and then negotiate directly with them.

Click chart to enlarge.

Bradley Siderograph

For traders that like to chart the Bradley Siderograph, the following links contain daily values through Mar'09 and weekly values from 2000 through 2009. These are CSV files which can be downloaded and used in Excel or most charting software systems.

(Monday April 28, 2008 PM): I came across the data for this chart from the website for U.S. Office of Federal Housing Enterprice Oversight. It shows the current total debt outstanding for U.S. residential mortgages from 1990 through 2007. We are currently right at $12 trillion. This chartline represents the aggregate growth in residences (new homes, condos, etc) combined with home price appreciation, as reflected in total mortgage debt.

Click chart to enlarge.

What struck me as particularly impressive is when combining my outlook from last night's update, the aggregate amount of lost home value appears to be a rather staggering sum. For example, let's assume a conservative home price recession that sets prices back to roughly what they were in 2003. The chart above suggest the loss on mortgage debt levels to be $12 - 7.8 = $3.2 trillion. But what I thought was stunning was if my forecast of a pice pullback to 2000 prices materializes, then the loss becomes $12 - 5.5 = $6.5 trillion. Never mind that my chart from last night suggested a worst case scenario might drop prices by perhaps 50%, the chart above, therefore suggests mortgage debt losses of over $8 trillion.

Let's ponder the conservative scenario for a moment -- if national home prices drop by -20% then the total value of mortgage debt loses -$3.2 trillion. This means, on aggregate, US mortgage holders may be underwater by this same $3.2 trillion. Because not only have home prices dropped by -20%, but there were many more new homes added to the market. If there was ever a big concern over the number of home buyers walking away from their mortgages, then I think -$3.2 trillion suggests a lot are likely to be walking.

You can do the math if/when a more serious downturn plays out, such as a drop of -30%, -40%, or perhaps as much as -50%, which would mean a drop in aggregate residential home values by over $8 trillion. To put this sum into perspective, the entire US GDP for one full year is $11 trillion, and the global GDP for one year is about $50 trillion.

There are about 40 million homes in the U.S. with outstanding mortgages. 10 million of those have adjustable rates (ARM's). The conservative loss of -$3.2 trillion means an average loss of $80,000 per mortgage, and the worst case loss of -$8 trillion suggests a per mortgage loss value of $200,000. Since mortgages are contracts between a lender and buyer, then with the buyer walking, the lender is stuck with the loss. This means the banks and Fannie Mae are going to get nailed. And now that the Federal Reserve is playing the role of pawn shop to commercial banks is buying mortgage backed securities (MBS) they too are vulnerable to big losses. Fannie Mae is unlikely to be able to withstand losses this huge... FDIC will be overwhelmed if any significant banks fail. That means U.S taxpayers will end up bailing out everyone, including Fannie Mae... and also the U.S. Federal Reserve.

These numbers are simply depressing.

(Sunday April 27, 2008 PM):

The Continuing Saga of the Rump Towers

Before anyone starts making accusations of doctoring up this photo, all you have to do is drive by The Trump Towers sales office on Collins Avenue in Sunny Isles Beach, Florida to see this is an authentic, albeit humorous, sign.

This time last year, the 3 Trump Towers buildings were completely sold out. In fact, as of Deember, 2005 Tower I and Tower II were completely sold out and Tower III was reported to be 99% sold. A typical 2 bedroom unit on a low floor was supposed fetch $1.57 million. Tower I required financing of $150.5 million in 2005 and Towers II and III recieved financing of $345 million in April, 2006. This averages out to a financing cost of $610,000 per unit.

My how things can change in only 1 years time. The updated Miami-Dade county tax records shows that only 36 units have been sold so far (out of the available 271 in Tower I). Tower II should get its Certificate of Occupancy this summer and Tower III perhaps this fall.

By comparison, further up the street the Trump Palace opened in spring 2006 selling 186 units (out of 278 total) in less than 6 months. The next Trump project is the 391 unit Trump Royale which should already be available for occupancy, but there no tax sales recorded yet with Miami-Dade county.

I am continuing to monitor these projects to use as a proxy for the rest of the S. Florida luxury highrise condo market.

US Single-Family Homes

The following chart will not be welcome news for recent home buyers, and particularly sour for those close to or already underwater with their mortgages. This is the post-WWII average price for S. Florida homes clearly showing the boom-bust cycles over the duration. I have added the red forecast line which I expect to play out over the next dozen years or so. It is clear that year 2000 was the breakaway moment -- when Alan Greenspan lowered interest rates to bail out the tech stock investors after the Nasdaq market crashed. These super-low interest rates fueled the hot housing market creating an anomoly that is extremely clear by this chart. Just reverting back to the mean (center trend line) will be extremely painful. But just like the overstretched rubber band chart line into year 2000, the snap-back is likely to fall below the lower trend line.

Click chart to enlarge.

The bulk of this downturn should occupy the entire 4 years of the next presidential term, making a re-election for their 2nd term highly unlikely. Fed intervention is unlikely to stop the housing bear market, except perhaps to prolong the pain by slowing it down and making it last for many more years that it otherwise should. Please note the previous 2 housing price bubble downturns (peaks in 1979 and 1989) fell quicker than the rise.

Home Buyers Looking for Bargains

The chart above should be good news for home buyers sitting on the sidelines waiting for bargains. Other than having to wait 4 years to get a great deal, buyers need to keep ther powder dry anticipating the orgy of great opportunities for both home ownership a well as investment. Different regional markets may experience slightly different bust timings, but this chart should be fairly consistent for not only the S. Florida markets but also as a national average.

For those that have been monitoring my previous charts on DJIA/Gold ratio and Gold/Silver ratio should note that the time to be selling long-term gold & silver holdings may be very close to the time when the housing market may be reaching its nadir. The 2012-2018 range is looking more and more like the transition period of the next big paradigm shift in investment opportunities. If things play out as I expect, then this timeframe is when the next great US stock market bull market should begin.

(Sunday March 30, 2008 PM):

Before I get to tonights feature article, I wanted to clarify a few things from my previous post concerning JP Morgan, who now control nearly a $100 trillion derivative portfolio. While a trillion is truely a very large number, please keep in mind that World notional value of all derivatives is estimated to be $516 trillion. Now 1/5th of all world derivatives is under the control of just one entity, JP Morgan. That alone should send shivers up your financial spine for two important reasons: One is the fact that so much risk is concentrated with the trading expertise of just one firm. Look at what happened when geniuses managed Long-Term Capital Management or the super-quants at Bear Stearns. Second, since our Federal Reserve has made it clear that it intends to intervene and support major banks & financial centers, JP Morgan and their $100 trillion is a ticking timebomb that US taxpayers should not be unnecessarily exposed to.

When I said that "experts" claim that 2% of any derivative trading portfolio notional value is truely at risk of loss, what they mean is that 2% is at risk during normal market volatility. If our current environment was low volatility and pretty much an all around "normal" market, then I would be only somewhat concerned. But perhaps the most important variable fed into derivative pricing models (such as Black-Scholes, etc) is volatility. Our current environment is anything but normal, volatility is well above normal. This means to me that the 2% loss figure is way understated.

But does this really matter? I mean if you shoot and kill someone with a 357 magnum pistol, does then stabbing them with a knife make them any more dead? If JP Morgan was already over-leveraged such that a "normal volatility environment" loss of their $84 trillion portfolio meant they could wipe out their entire assets of $1.24 trillion ($84T x 2% = $1.68T), then how much more damage will an extra $13.4 trillion do? ($97T x 2% = $1.94T) Hey, in finance, someone ends up having to pay for the loss. If a 2% event occurs, take $1.94T minus JPM assets of $1.24T and the Fed ends up forking over $700 billion! That is bad... but what if market volatility increases such that a 2.5% loss occurs, or even a 3% loss? In a 3% scenario the Fed's ante is $1.67 trillion.

Now that is really bad... but the worst is that the derivative portfolio is still not dead yet... derivatives are not dead until the contracts maturity date. A 2%-3% loss could occur on the short-term securities, but the longer-term securities that have not expired yet, still have potent toxic venom as they near maturity -- meaning that additional losses are still possible.

If you think you have a good grasp of the situation now, there is still more to contemplate. JP Morgan does not operate in a financial vacuum... there are thousands of counterparties that regularly trade derivative products with JPM. There are many banks and financial centers that trade derivative products similar to JP Morgan's. If JPM goes belly up, each of these partys are also vulnerable and it can cascade all the way down the financial food chain.

The Fed will have to throw in the towel somewhere... meanwhile, US taxpayers (and JPM employees) will suffer the consequences.

South Florida Real Estate - Trump Towers

Sunny Isles Beach, Florida is the poster child for the real estate bubble in S. Florida. On a recent visit I decided to do a little investigation into the highrise condo market there. I could have picked from a dozen beachfront highrise projects currently under construction, but I chose one of the Trump projects, as in Donald Trump. Mr. Trump did not personally build these projects, he found investor/developers to do it and take the risk. But he did lend his name to the projects, and that means he still has a vested interest in making sure the projects are successful.

The project I have focused on are the three Trump Towers I, II, and III located at 16001, 15901, 15811 Collins Avenue, respectively. Each building has the same floor plan and consist of 271 luxury units per 45 story building. A total of 813 residential units in this project.

While the buildings were under construction, the buzz around the real estate biz was that the 1st building had to be 2/3 sold before breaking ground on the 2nd building, and likewise for the 3rd building. The photo shows that all three buildings were under construction as of spring 2007. So apparently there was a lot of interest in these properties to give the go-ahead to break ground on all three towers.

The updated photos show that building I is complete enough that owners have begun moving in. The building is essentially already functional. Even the valet boys are operating 24/7. Building II has a completed shell exterior, but the insides still need final polish. Building III remains under full construction.

Knowing that the housing market is in current chaos and on the brink of a significant downturn, albeit collapse, I decided to check the tax records of the sales & taxes for this project.

According to Miami-Dade County tax records, as of 3/28/08, only 19 units have been sold!

You read that correctly! Out of the 271 units in Trump Towers I, only 19 have been sold to individuals or investors that have actually put down the cash (or mortgage) for these units. Four units are apparently earmarked for Mr. Trump. The remaining 248 are "owned" by the developers headed up by Dezer Development and The Related Group of Florida (using the names TRG Sunny Isles V Ltd, TRG Sunny Isles VI Ltd, and TRG Sunny Isles VII Ltd for buildings 1, 2, and 3, respectively.

Closings were slated to begin in December, 2007. But so far all of the buyers completed their contracts in January or February, 2008. I did not see that any new buyers showed up in March, but perhaps the County is slow in updating the records, or perhaps I am merely jumping the gun.

One of the 19 buyers bought a 3 bedroom, 3.5 bath, 2950 ft2 unit for $1.1M. The same unit# is already listed as a re-sale on Zillow.com for $1.3M. With almost 800 similar Trump units available or soon to be available from motivated developers, wanna bet this owner ends up selling for a lot less than their original purchase price?

More from South Florida Real Estate

An interesting twist is the Miami-Dade condo supply (MLS listings). Condos priced under $250k increased 25% in just one month from January, 2008 to February, 2008. These lower-priced condos account for 41% of all available condo inventory in the area. But for condos priced over $1M inventory actually decreased. If financing is an issue, then those buyers with the big cash may be still buying, and doing it without financing. But it may also be possible that these higher-priced units were simply taken off the market to await for better prices or to rent them out... or, may be reclassified, such as bank foreclosure. Another consideration is that a lot of luxury unit construction is going on right now (like the Trump Towers discussed above), and these have not yet been added to MLS inventory.

Condos priced between $1M and $2.5M had inventory (in Miami only) of 1451 in Feb'08 with 27 sales. Condos priced between $2.5M and $5M had inventory of 315 in Feb'08 with 5 sales. If these sales rates continue, this calculates to 4.5 years and 5 year supply, respectively.

Condos priced below $1M have previously been selling at a rate of 72 per month. The current inventory (not including projects under construction) is estimated to be a 5 year supply. If one includes new projects (and compounded by difficult-to-get condo mortgage financing), this inventory could swell to 8-9 year supply.

As for future projections, the following chart (edited by Miami realtor John Carpa) was found on a Miami R/E blog. This shows how a typical 1 bedroom oceanfront condo price soared from 1999. The inset shows since October, 2007 prices for properties listed over 150 days have been dropping at a steady rate of about $20K per month. His projection line suggests prices will have to drop to pre-2001 levels over the next decade. His peak was $399K ($317/ft2) in 2007 and 2001 was $230K ($183/ft2) -- an expected drop of 42%.

Click chart to enlarge.

This next chart confirms from Zillow.com that the typical 1 bedroom oceanfront in Sunny Isles Beach peaked in Summer/Fall of 2006. Thus, an $85K unit in 1999 was valued at just over $400K in 2006.

Click chart to enlarge.

The foreclosure rate in Palm Beach County, Florida surpassed $1 Billion in defaulted mortgages during the 1st 6 months of 2007.

Since a majority (I have read up to 90%) of sub-prime mortgages were of the teaser ARM variety, and ARM rates are going to reset higher, the chart below suggests we could see $30B per month in resets over the next 12-16 months. Of these, perhaps 50% may end up in foreclosure.

Click chart to enlarge.

The Chicago Merchantile Exchange (CME) is trading futures contracts on the Case-Shiller housing index for selected cities. The following reveals the Miami "futures" chart through the end of 2012 where current expectations are for an additional drop of 27% in residential property values.

(Sunday March 23, 2008 PM): A quick note... apparently Bear Stearns derivative portfolio notional value was 13.4 Trillion as of last weekend. J.P.Morgan's was $83.9 Trillion as of Q3'2007. Taking on Bear Stearns derivative portfolio means JPM could now sport a portfolio in excess of $97 Trillion (however, I am sure JPM & BSC have a portion of inter-counterparty trades that will essentially net out when the portfolios are combined). Nonetheless, anything over 1 trillion is a huge number, but anything approaching 100 trillion is so large that should never be allowed to be concentrated with one company.

If it was JP Morgan that was about to go belly up last weekend instead of BSC, who would have been able to step up to help bail them out? The Bernanke script suggests it would have been almost entirely upon the Fed... which translates to you and me... and our children, and their children. Do the math: experts claim that average derivative trading portfolios are really "at risk" for about 2% of the notional value. 2% of $100 trillion is $2 trillion. If that ends up being JPM's loss in this, then we as individuals will end up paying for it by amortizing this loss over many years of US budget deficts. If Bernanke chooses to print his way out of any bailout, then the inflationary tax will be a permanent scar and reminder of this foolishness.
Bear Stearns was not too big to fail, but JP Morgan is. The precident has been established. We should all be very worried.

(Saturday March 22, 2008 AM):

The following was a posting I made to several chart forums late last week. I had hoped to have time to embelish a bit with charts and article links, etc. But yesterday I noticed that a lot of mainstream online articles are already discussing the same scenario -- so my "enlightenment" it seems was already well disseminated. So I decided instead to take the weekend off and enjoy Easter Holiday with family & friends.

For readers that are still not too clear about what is happening right now with the sharp selling of gold & silver and the abrupt rise in US Dollar, perhaps my tome will help in that explanation.

I am calling it: The Great Unwinding

I woke up at 3:30am this morning with an epiphany moment. You know that feeling you get when you are putting together a complicated jigsaw puzzle, you got a lot done, but you go for a while with nothing new added... and then someone walks by and goes, "oh, here, this one fits right there..." and then walks away... ok, that feeling right there, that's what hit me once I realized a lot of the pieces of the financial markets had been there all along, I recognized them individually for what they were, I thought I had understood it, but apparently I had not yet put the whole picture together... and then wham! It was suddenly crystal clear.

I think Denninger's posting last night may have been the trigger and my subconscious must have been churning over it as I slept.

It is all about the hedge funds and financial houses that have essentially treated their trading strategy as though it were a hedge fund. Companies like Bear Stearn & Lehman are excellent examples. I'll toss all of them into the same bucket of "hedge fund". The hedge funds have no rules, some are long some are short, but they all use massive leverage to achieve big results.

And, they are into everything, every commodity, precious metals, wheat, oil, shorting the Dollar, anything with a momentum that they can ride on. During 2004-2006 it was not uncommon for mortgage-backed hedge funds to pay out dividends in excess of 50% per year. The only way that can be achieved is through tremendous leverage. We know for example, that Carlyle was leveraged 32:1 (which is probably modest compared to other hedge funds) despite the fact that they believed their investments were AAA and fully guaranteed by US government... hey, this was practically free money!

Now the great unwinding is taking place. The leverage that worked so well when things were going their way, now works with opposite intensity as things contract. As such, hedge funds are getting margin calls -- not just little annoying ones, but big "oh shit" ones. To make those calls, hedge funds have no choice but to sell off their inventory to generate the necessary cash. If the funds were run by saavy traders, they would already be out of the riskiest stuff to minimize losses and the only things remaining would be the big gainers, like: Dollar shorts, oil longs, silver longs, etc. However, not all of the funds were managed by great traders, they were managed by mediocre or worse, because what many are still holding are the most toxic of mortgage-backed securities, highly leveraged. Not willing to sell the biggest losers, they instead are selling their few winners... throwing the baby out with the bathwater along the way.

Timing wise, this all appears to be happening since this past weekend... the fit has hit the shan.

Since hedge funds can trade virtually anything, it is difficult to say exactly how things will work out. But I expect a contraction toward the center. In other words, the biggest recent gainers will be sold, and the biggest recent shorts will be bought. Many hedge funds will end up negating each other -- if their timing is similar they will simply net each other out and the market will not see too much of it -- but if their timing is disjoint, then we are likely to see huge volatility swings back & forth during this great unwinding.

This explains why gold & silver have taken such a huge hit this week. Even great mining stocks, such as Goldcorp (GG) getting knocked for over -20% (this mornings low was -$10 from its recent high of $46.30).

I see the Bear Stearns episode as a proxy for all hedge fund-like enterprises. Of the 7000+ hedge funds around today, perhaps only 700 will still be around 2-3 years from now. This is just the beginning, folks.

A lot of what happened to Nasdaq in 2000-2001 will be repeated here because in the late 1990's traders were bidding up NDX stocks using margin accounts employing similar albeit less extreme leverage as today's hedge funds. This leverage created air pockets in the stock charts as the prices rose. Then when prices fell, they imploded much faster as prices fell through those no-support zones. Some have measured the Nasdaq drop as a loss of several $trillion in market capitalization value... but that value never really existed anyway because so much of the run-up was driven by marginning leverage. The same should apply with anything the hedge funds played with in momentum-driven rallies (or short runs). As they unwind, the price drops should be just as impressive as the rallies were. The loss in market capitalization will be just as impressive except hedge fund unwinding will unload hugely leveraged strategies resulting in market cap losses of tens of $Trillions.

In my opinion, gold has a great outlook. However, in light of my view of hedge funds selling whatever they can, I think we could see low-$800's before we see $1000 again... and if that does not hold then the low-$700's. Silver may pull back to mid $15's. If this happens, back up the Loomis and load up. But between now and then it could get quite painful for many PM investor portfolios.

Long term precious metal investors should not fret too much as this will appear as a temporary blip in the charts. 2008 will be the transition year as the hedge fund unwinding influence resolves itself and a new base is established for gold & silver. This will be where more individual investors will start buying gold & silver. I personally do not think we will see $2000 gold this calendar year, but I do think we will see $1000 again after the great unwinding has unwound, late this year. I also think silver will be the better long term investment over gold as the gold/silver ratio is likely to narrow from 53:1 to 20:1 over the next 3-4 years. Both gold & silver will do well, I just think silver gets the nod for best percentage gainer.

(Friday February 8, 2008 PM):

Many analysts have suspected that commerial property was next in line to be hit with the contagion of credit contraction. Now we have definitive evidence that it may be about to get hit hard.

Karl Denninger mentioned it in his technical video, but to really see the comparison between credit grades I created the following chart:

Click chart to enlarge.

This chart shows the 6 credit grades from double-B to triple-A as a percentage change in BPS (basis point spread) from 1/1/2008 to 2/8/2008. Beginning Monday (2/4/08) of this week all grades of mortgage-backed securities basis point spreads widened out, but notice how the AAA and AA really widened the most.

Mortgage backed securities on super-prime commerical real estate, rated AAA, went from a BPS of 118 on 1/30/08 to 149 on 2/4 which by itself was was a big change, but by friday (2/8) it had blown out to 224! The chart says it all... this was a huge move! An increase of over 100 basis points in only 7 trading days.

So just when the banks and media were trying to convince everyone that the worst of sub-prime was behind us the next wave, from PRIME commerical real estate, is beginning to wash in.

The gold chart is looking particularly bullish. The wedge (or pennant) pattern since Nov'07 highs shows progressively lower highs and higher lows. The technical nature of this pattern is like a coil or spring being wound tighter and tighter into a smaller and smaller space. Eventually all of the energy stored in the spring explodes in an abrupt move outside of the wedge pattern.

Click chart to enlarge.

Even though gold prices have already trebled from $250's to $800, the current fundamental outlook is as bullish as it has ever been since 2001.

Monitor this wedge pattern very closely as it weaves back and forth within the boundary lines in an ever-tighter coil. As soon as the price breaks out of the border lines, the price is likely to move very quickly. Because of the tremendous bullish fundamentals of gold, the price could knock up $900 before the end of Q1'2008.

(Wednesday October 31, 2007 PM):

Flash Update: Spot gold closed today for its highest monthly price in all of its glittering 5000 year history.

(Sunday October 29, 2007 PM):

What do Rumpelstiltskin and CyclePro have in common?

Well, not 20 years... but CyclePro Outlook puts the PRO in PROcrastination. There have been dozens of times in the past several years that I wanted to update CyclePro Outlook. However, each time the subject was either more opinionating on current events or rehashing more of my primary investment strategy. Discussing current events as they unfolded quickly rotted between the time I wrote about it and the time when I had available to post it. As for the investment strategy, there was nothing new to post, just the same ol', same ol'.

Actually a lot has happened over the past 3 years... I was there while the Enron fiasco temporarily pulled down the Houston economy enough where I was not certain to find comparable consulting gigs like I had before. Since the air pollution in Houston (the most polluted city in the US) was causing health issues for me I decided to step off the career train for a while and have some fun. So I moved to south Florida and went to Culinary School. I got my culinary degree and chef certification and moved on to baking and pastries... but wouldn't you know it, just when the chocolate quarter came up (can you believe it, an entire school quarter devoted entirely to chocolate) I got an offer to do some consulting out of state. It was supposed to last only 2 months so I thought I could return and resume baking. But alas, the client decided to extend my contract and amost 3 years later, I'm still there. I decided the culinary diversion was just that, a diversion at a time when I needed a change of air quality, change of outlook, and change of perspective, and everything in between. While in Houston I was having to take a daily prescription for high blood pressure, popping pills for almost daily headahes and/or migraines, lack of energy, and just an overall yucky mood. In just 2 months in Florida spending as much time as possible at the beach, I was feeling much better. After 1 year my health returned to what it should be, high blood pressure back to "normal", no more daily headaches or migraines, my doctor took me off all medications. I am now healthier at 49 than I was at 29.

CyclePro Outlook - Where everyone is entitled to my opinion.

Now that the sub-prime real estate debacle has stared to unwind, the stock market is at new highs, the world economy is destabilizing, and of course gold is shining brightly at the moment -- all good reasons to jump in with an updated opinion. After all, I believe everyone is entitled to my opinion... and it is just that, an opinion, not investment advice.

Where are we now?

For starters I need to update my previous forecasts to see where we are... on track? or do we need to readjust?

My most famous chart, the 200-year inflation-adjusted chart of US stocks, is so long-term that even after 3 years it has not moved very much.

Click chart to enlarge.

However the following is a zoomed-in view of the most recent activity:

Click chart to enlarge.

The most recent rally looks like it is heading to the top channel line again. Bouncing and trying again to hit the top channel line is similar to what happened in the 1899-1906 topping event. This chart uses inflation data from US Federal Reserve websites. The Fed's CPI is about as useful to economic reality as a DVD Rewinder is for DVD's.

Using inflation data from Shadow Government Statistics website (www.shadowstats.com), the following clearly shows the 17.6 year cycle top in 2000. The current rally, after adjustment for inflation, appears as a feeble bear market rally. From an Elliott Wave perspective, it looks like the current rally may still have some frothy legs to rally higher yet. But keep in mind, I believe this is only a rally in a larger bear market as this chart shows and eventually there will be a collapse of immense proportions.

This chart helps to pin a timeframe for the next DJIA trough. Adding 17.6 years to January, 2000 reveals Q3'2017 as a likely low.

Click chart to enlarge.

Sorry for repeating this, but please keep in mind that these charts are adjusted for inflation. This means that the printed DJIA level in the future may very well be higher, perhaps even much higher, than today but the value of the dollars for which the DJIA will be priced will be worth significantly less than today. So much so, that even with a higher printed DJIA price the actual value relative to 2000 may be cut in half or less. The rising centerline in the first chart suggests a conservative target low of about 6500 by 2017 and if it goes down to the first lower channel line then perhaps 3300... or worse case scenario, down to the lowest channel line at 2200.

If you look back in history, each time the DJIA touched the top channel lines, eventually it traded down to the lower channel lines. There is nothing that I see that will change this pattern.

Vindication!

Back in 2003 when crude oil was $26 I took a lot of heat from a few readers for forecasting that $40 was an "inevitable certainty" and longer term I expected over $90 with a possibility of triple digits. Understand that in that timeframe crude oil had just doubled from 18 months earlier and people were already complaining of high prices at the pump... yes, those $1.20 pump prices were rally gouging our household budgets! Well $40 came and went. Last week we saw $92. Haven't seen $100 yet... nonetheless I feel quite vindicated with that original forecast. I had originally thought the $90-100 price would occur before 2010... I really had no idea it would happen so quickly.

No More Gouging at the Pump

I find it interesting that when crude oil prices hit $40, prices at the pump were almost $3. Then crude oil surged to $60 and pump prices returned to $3. Now that were in the $90 area, pump prices are still $3. Big Oil may be making a ton of money right now, but as for refinery margins, certainly consumers can see that with improved efficiency and thiner profit margins, Big Oil has been able to successfully keep pump prices quite low. Back when we first hit $40 crude, I had thought that $90 crude would mean at least $6 at the pump.

Any Way You Burn it, High Crude Oil Stokes Inflation

Crude Oil is the world's most consumed industrial commodity. As such, it essentially functions as a currency too. While a lot of the currently high price is reflective of a weaker US Dollar, crude oil is still higher to everyone worldwide. The high price of crude cascades through the rest of the energy products because as consumers seek alternatives, those products price must also rise to satisfy the new demand.

How Is Crude Oil Related to Doughnuts & Coca Cola?

Because of high Crude prices, ethanol is being touted as a domestic solution to reliance on foreign supply. Ethanol is made from corn (although not very efficiently... sugar cane and certain grasses make for more efficient ethanol production). As a result, corn prices risen dramatically. Because of high corn prices, farmers seeking alternatives have used wheat. Mexico is having a shortage of corn tortilla. High wheat prices affects baked goods. When corn is used for ethanol, it is not available for making corn sweetener, which is used in Coca Cola and other sweetened sodas and soft drinks. This is texbook for price inflation. Monetary inflation is caused by the Federal Reserve printing up too many Dollars... and that is happening too. But price inflation is when shortages caused by high demand requires higher prices to relieve the pressures. So while most people simply view high crude oil as affecting prices at the pump, or heating oil for the winter, or jet fuel for airplanes, the real affect bleeds through the entire economy and no one is completely isolated from its effects. You cannot ship a package without fuel for jets or trucks. You cannot make corn sweetener with out corn. You cannot make doughnuts without flour. And don't forget about all of the plastics that are byproducts of crude oil -- look around your home or office and note how many items are made with plastic.

Crude oil directly or indirectly affects just about everyone in developed or developing economies, every individual, every business. No one will be able to escape its inflationary influence. Airlines will be hit hard, I expect them begin upping their flyer-mile mileage requirements for free trips. Airline tickets and shipping companys will be adding fuel surcharges soon. As heating and cooling energy prices rise people will seek alternatives, that should cause price increases for things like solar panels and wind generators. The list of product price increases will be endless as one increase affects another, and the price inflation ripple cascades through just about every product that everyone uses.

In the 1970's 250 ounces of gold bought a nice house and 50 ounces bought a decent car. Today the same 250 ounces buys a $200,000 house and a $40,000 car. In 10 years I expect the same ounces will also buy a nice house and a decent car. Prices are rising for holders of Dollars, protect yourself and your wealth, buy gold.

Frankenstein Seedstock

On the subject of corn, Monsanto and Cargill may soon have supreme control over corn and other argi-grains once they successfully introduce and enforce the use of their newest genetically-modified seeds. As the demand for more corn acrage and higher yield increases, Monsanto/Cargill will be only too willing to accommodate with their new wonder seeds. These frankenstein seeds grow once but whose progeny seed is sterile and will not sprout if replanted. As such, farmers will become slaves to the Mansanto-Cargill cartel and be forced to buy their seed stock each and every spring. Heirloom seed stock will eventually become rare and may even become extinct as the new engineered seed will be more resistant to persistent pests and fungi.

Old Charts, New Charts

Before we get into gold, let's look at how the DJIA-Gold ratio charts are shaping up. The previous chart suggested that gold would outperform the DJIA until 2013-2018 timeframe. Three years ago the chart was at 27 and today it is at 18. Clearly, this forecast continues to be on-track for a lower ratio. The final expectation is conservatively somewhere around 2:1. Richard Russell has been saying he expects closer to 1:1. It really does not matter since anything near Mr. Russell's or my estimate potends a disaster for stock investors.

Click chart to enlarge.

As a reminder of why the ratio should collapse, the following chart demonstrates the long-term inverse relationship between inflation-adjusted DJIA and the price of gold.

Click chart to enlarge.

The two major cycles of the past century shows that the price of gold should peak right at or just before the lowest point of the inflation-adjusted DJIA. Nimble investors will attempt to switch investment strategies at that time. As for me, this is retirement stuff so I have no plans to tag the bragging rights of hitting the perfect top. Rather, my plan is to begin exiting gold as the DJIA-Gold ratio approaches 2:1 and not worry about missed opportunities if the ratio moves lower to 1:1. I will say this though...
a move in the ratio from 2:1 to 1:1 means that during this episode either the price of gold doubles or the DJIA level cuts in half -- that's a lot of "opportunity" left on the table.The peak in gold is likely to be another brief spike so it will be a more conservative strategy to be a few months too early than a week too late. But hey... according to these charts that could be 10 years from now -- on the other hand, theings have been happening a lot quicker than we had thought, so it is best to not become complacent and continually review the progress of our charts and indicators.

Breaking a 5000 Year Old Record?

I do not have much new information to add to my previous forecast for gold. We are clearly on track for higher prices. My original forecast made in 2002 was for $2000/oz by 2012-2014 with a possible brief spike to $3000. It was not mentioned by any media or newsletter that I can find, but as far as monthly price charts go the September, 2007 monthly close for gold was the highest
monthly close ever! Even in 1980 when the price peaked to $850, it was mid-month and prices dropped by the end of that month. For very long-term charting, this new high is a significant event that no one seemed to catch. October, 2007 looks like it may close at an even higher price... another all-time record. A few in the media refer to 27 or 28 year highs which compares to 1980... but as far as monthly closing prices go... the 5000 year history of gold is a very long time and we are knocking on that most significant new record.

From an Elliott Wave perspective, we are clearly in the early stages of a dramatic wave 3 rally. For me personally, I have been trying to finese into several leveraged gold securities (such as options and gold exploration and mid-level mining companies) but waiting for a pullback has been an exercise in futility. This is the stuff wave 3's are made of. My core position and mid-timeframe investment strategies are fully invested. What I am attempting to do is play the upcoming massive rally with a playful short-term strategy. I am not alone. The gold camp is quite bullish right now and from a contrarian point of view a pullback "should" happen soon. But what we have had lately has been intra-day pullbacks, but nothing deep enough to trigger buy limits. This means the stochastics overbought levels are likely to stay in overbought for extended periods of time. If I miss out I have my core and mid-timeframe positions working for me. But the short-term stuff is merely to exercise my adrenaline.

Gold Bugs, the Immoral Hazard

Gold is and will continue to be manipulated by central banks. Of course it does not make sense to keep this charade up any longer, but central bankers answer to other interests. Another central bank supported sell-off in gold is still likely. If all I have to go by is the price charts, then it appears gold prices could continue ratcheting higher for several more months before traders take a breather. Central bankers don't necessarily look at price charts so they could intervene at any time. This is like the inverse of moral hazard. Investors in stocks believe the Fed will allow them to reap fantastic gains as prices rally but always intervene to bail them out if prices tumble. For gold the interests are reversed. To the central and bullion bankers, gold bugs are like casino Craps players who bet on the "Don't Pass" side of the roll -- pessimists that should not be given a moral handout for recognizing what is
really happening. For the past 6 years of this gold bull market, gold traders have been jabbed by central and bullion banker selling as prices rallied too much too quick. The bankers would rather hold the price of gold flat, but they may no longer have the inventory to do so. Collectively they still have enough to sting the market again, but I doubt their collective interests are as
aligned as they once were. It is also quite possible that they are scraping the bottom of the barrel to come up with sufficient bullion -- The Bank of England discovered that a portion of their scantly remaining inventory (which may be several hundered years old and lacking modern purity standards) is of sufficient quality to sell into the market. At some point they have to ask themselves, we own an asset that is rising in value, shouldn't we be holding this instead of trading for Dollars that are falling in value?

Gotta Get GATA

The boys over at GATA (www.gata.org) have been called every conspiracy-laced derogatory name in the book... but you know what? The evidence is building. They were right then and they are right now. Quite frankly I am pleased that the banks had been selling so much gold over the past 20+ years. It has allowed me to buy gold and silver at very low prices and position myself to be prepared in a rock-solid investment for the coming economic debacle.

Gold-Silver Ratio

Three years ago the Gold-Silver ratio was at 60:1 and suggested silver would continue to strengthen relative to gold. Today the ratio is 55 so it continues. The peak of 97 was in 1992 and adding 25.5 years to that suggests a ratio low near 17:1 sometime during 2017. Adding 48 years to the previous ratio low in 1968 suggests late 2016 as the next likely low. You can do the math... if gold peaks out at 2000/oz then silver should be close to $120/oz... likewise $3000 gold suggests $175 silver... and for the ultra-bullish gold price of $5000 reveals an estimate for silver of almost $300/oz.

Click chart to enlarge.

Sub-Primevil Mortgage Lenders

Sub-prime is the scapegoat buzzword for the collapsing mortgage and credit derivative markets. Sub-prime by itself is not a as bad of a problem as it may appear since there have always been mortgage loans for borrowers with less than perfect credit histories.

But the current street definition of sub-prime is the toxic transformation of sub-prime borrowers who stretched their finanical history in their favor, or purchaed homes for investment flipping while saying on their loan apps that the homes were to be owner-occupied. Sure, sub-prime variable-rate and teaser-rate loans were a disaster even before the first loans were written, but it is
only the tip of the ol' iceburg. The same mentality that created the environment for sub-prime mortgages to flurish also allowed otherwise higher quality mortgages to slide into lesser qualities. The credit rating agencies, largely through their own faulty revenue structure, continued to get paid by banks to rate packages (called tranches) of mortgages at their original/higher quality level. As a result, investors bought what they thought was high quality, low risk securities. To make matters worse, much worse, hedge funds, banks, and pension plans began buying these asset-backed debt obligation packages (CDOs: collateralized debt obligations) for their high yield. That in itself would would be bad, but what made it toxic was how, particularly the hedge funds, used these CDO's as collateral leverage to buy even more CDO's. It was not uncommon for hedge funds to pyramid CDO's on top of CDO's to return 30%, 50% even as high as 70% to shareholders. Wanting to keep up with the Jones's, banks and pension funds followed suit.

Clearly, while this was developing, no one seriously took a step back to ask whether these high yields were appropriate. Generally if something is too good to be true, then it probably is. But no one seemed to care as long as the gravy train rewarded them with windfall yields.

The Arthur Anderson Approach to Credit Rating

The last time I witnessed such an orgy of abundant & grossly negligent investment blindness was in the late 1990's when in the height Houston's energy trading industry, everyone was in awe of Enron's seemingly unstoppable profitability. So everyone wanted to be just like Enron. Many of the clients I consulted for were actively building trading organizations that would attempt to rival big brother Enron. Keep in mind that Enron was secretly siphoning off their losses onto off-shore accounts thus artificially inflating their apparent profits -- all with Arthur Anderson's professional audit blessing. Even though many of the Enron-wanna-be managers suspected Enron's above board strategies were borderline illegal or worse, they still continued the pursuit of questionable finance for themselves. I recall hearing a joke about Enron, "it's only illegal if you get caught". Once the Enron castle collapsed, so did many of these wanna-be's. After paying huge fines, loss of market share, and reduced investor confidence, the trading shops that still exist have transformed themselves back to their original core business, keeping whatever derivative business they still have under tight audit scrutiny and well within VaR (value-at-risk) parameters.

Several years from now, I expect that at least one of the big rating agencies will no longer exist and the others will have their revenue structures completely revamped. As for investors buying into this titantic superfund -- the term "dumb schmuck" comes to mind. I think you'd be better off buying a highrise condo in North Miami Beach, at least while losing your money you can still enjoy the view.

Superfund Bailout: Banks Too Big To Fail, Screw Investors

And now we hear about a rescue plan for the biggest domestic players in the sub-price market. A $75-80 billion superfund will be created to purchase asset-backed securities from Citibank, JPMorgan-Chase, and Bank of America which is supposed to stabilize the valuation of the securities. Apparently the junkiest of these securities are supposed to be written off and only the higher quality
securities sold to the superfund. I read that the fund will buy these packages at 94 cents on the dollar. What this implies is since this will be considered a "market value" any other bank or fund holding similar CDO's will be able to value them also at 94 cents... instead of 50 cents or 30 cents or whatever the real market would otherwise value them at. Essentially, this is little more than a circuit breaker for a financial product that has no clearinghouse. While the stock exchanges will shut down if stock prices fall too far too fast, this superfund is intended to do the same thing. It allows the entire market to take a breather and hope calmer heads will prevail and CDO valuations will return to their previous levels, and everyone will live happily everafter.

I am truely a contrarian when it comes to investing, so when the streets are flowing red from the blood of wounded investors, it generally signals a time to begin investigating opportunities. This time I am not even remotely interested -- I think there is much more blood to be spilled. In fact I think any investor thay buys into this superfund right now will be making a huge mistake. I'll leave the act of juggling with knives to the circus. First of all, who makes the decision about which tranches will be sold? The Enronesque credit rating agencies that inappropriately (fraudulently) mis-rated them in the first place? Or the banks that desparately need to unload their toxic waste -- losing only 6% sounds to me like a bailout dream come true for the banks. Since the US Treasury has been involved in the negotiation of this superfund, I can only guess that any oversight by SEC or Congressional banking & finance committies will be completely sidestepped. It appears to me that this superfund is little more than pulling an "Enron" right under everybodies noses. The apparent moral hazard and the eventual aftermath will be just as predictable if not horrifically more widespread.

And, what happens if the investors of this superfund sustain massive losses or the fund eventually collapses? Because of the involvement of the US Treasury will the banks be granted immunity from investor lawsuits? Goldman-Sachs was invited to the design meetings of the superfund, why did they back away?

Does Anyone See A Bubble on the Horizon?

One after another, we see a bubble burst, the Fed rushes in to rescue and as a result creates another bubble. Rescuing CDO holders is likely to spark another bubble somewhere. Where will it be this time?

If in Doubt, Stay Out

If you get a chance, take a look at your current money market fund holdings. I have an account with Fidelity Investments with 2 separate money market funds, one tax-free and the other taxable. For some reason, I expected the funds to have solid, extremely low-risk investments -- silly me. I discovered that is not necessarily the case. The funds stated purpose is to maintain a $1 NAV price while returning a relatively high yield. Yet in both funds I found a higher percentage of CDO's and commercial paper collateralized with mortgage CDO's than I thought should be prudent considering the toxicity of the leveraging being used behind the covers. I decided not to take any more risk until this whole sub-prime & mortgage CDO situation settles down. I know I will lose 1% in yield, but since I need to keep some cash in money market I moved nearly all of those holdings into a US Treasury backed money market fund.

Can't be CyclePro Without Some Bush Bashing

Look at me, I just went through all of this stuff without even once mentioning anything bad about George W. Bush. While I could list all of the reasons why Bush is to blame for ignoring all of trouble signs and allowing the economy to slip into the massive mess we are in, but you have heard it all already. I will say this, it is truely unfortunate for the chain of events that we have experienced over his presidential tenure and for the events that will unfold and ripple through the near and distant future. It is too big of a mess to avoid. But in order for my most bearish forecast to materialize (as is happening right now), it required someone like G.W. Bush to allow it to happen. Had other candidates won the presidency I am sure some of the events would have still occured, but I seriously doubt it would have been as bad as what we have now. A lot can happen in the 15 months remaining in the Bush tenure. Not enough time to fix the mess but ample time to make it much worse.

It seems Bush is only a moment away from starting a war with Iran over its alledged nuclear bomb capabilities. Iran, Bush says, is the biggest threat to our national defense. Yet while all this sabre rattling is going on, China is quietly testing and preparing to create a lunar orbiting vessel that may someday have the maneuverability to seek and disable individual orbiting satellites all while being controlled by mobile submarine control centers. If China suceeds, good bye cellphones, good bye pagers (does anyone still use those relics?), good bye CNN, good bye satellite radio, good bye GPS-guided missiles. If China suceeds, the war in Iraq may be over sooner than we think.

Is it just me or does this whole Iran thing sound like another maneuver by Bush to keep oil prices high for his Big Oil buddies, to continue destabilizing the Mideast, and to further debase the Dollar through runaway defense spending? If China succeeds in its mission, we have no defense. Is this not a greater threat?

Being Prepared While Preparing is Still an Option

I have prepared myself as best I can for the economic upheaval that I believe we will experience over the coming 5-10 years. I am a late baby boomer that will reach retirement age right about the time I think stocks bottom out and gold peaks. I prefer to be wrong about my forecast. But in the event that I am correct (and all evidence right now suggests I am squarely on track) then the best I can do is be prepared while preparing is still an option. I started buying most of my physical gold in 2001 and even with recent purchases my weighted average is still in the low $300's. My first purchase, which was actually a mutual fund which I thought was a very conservative move for my IRA, was in February, 2001, the US World Precious Metals fund (UNWPX) under $5. It is now over $35.

While that has turned out to be a good investment in itself, what has made it a truely great investment was that the reinvested dividends along with rising NAV value actually paid for the original investment after only the first 2 1/2 years. What was originally supposed to be a "conservative" investment turned into a 10-bagger in 6 years.

For the record, CyclePro Outlook formerly turned bullish on gold on April 2, 2001, one day after the COMEX low price was traded. I started buying gold related securities in February, 2001 because my initial trading was intended to be "conservative" and for that I did not really care that I picked the absolute low... just getting near the low was my primary objective. I bought UNWPX for $4.89 and Harmony Gold (HMY) for $5.53. In May, 2001 I wanted to get a little more speculative and bought Golden Resources (GSS) for $0.58. October, 2001 I started buying physical gold and bought the Perth Mint year 2000 1oz gold dragon coins. In February, 2007 the premium in these coins had attained significant collector value so I traded them in to convert the premium into increased bullion ounces of both gold and silver. In October, 2002 I discovered Goldcorp and started buying it at $9.90 but it dropped in
price so by March, 2003 I bought more, much more, at $3.38 and in December, 2003 it recovered and I bought even more at $12.26. Not exactly a perfect buying record, but in hindsight and a current price above $30 I have nothing but pride for following through on my core investment strategy and buying at regular intervals regardless of the price... the dollar cost averaging approach.

Aren't Dividends Just Quaint Relics of the Past?

No one seems to consider dividends any more. If a stock or funds pays any dividend at all, most investors see it as a quaint gesture or outdated relic from the past, but nothing more than that. I expect that by 2014-2017, dividends will become a major consideration once again. With that in mind, if an investor is trying to decide which of 2 investments is the better choice, and all other comparisons are equal, choose the one that has the best opportunity to pay dividends or to increase their dividends... and reinvest them. The UNWPX example above demonstrates how the stock (or fund) itself returned 7x gains, but the dividends alone returned an additional 3x.

"Hope" is a Very Poor Trading Strategy

Right now U.S. stocks don't pay squat for dividends. Now it is all about speculative price appreciation. But I expect that to change. My current retirement plans expect that dividends will play a major role in my retirement income. It is not hope by which I make this expectation, the economic cycles of finance also include the ebb and flow of investor fads, such as dividends. Although I do not possess the chart data to demonstrate and/or forecast it with the same exactness as my other forecasts, I do expect dividends from blue chip and high quality stocks to be paying double-digit dividends 7-10 years from now.